Financial literacy and the design of retirement plans

We design and administer a financial literacy test tailored to a specific defined contribution plan. We find that participants show fairly good knowledge of the basic mechanics of the plan, but are unable to differentiate among various investment options. Knowledge is particularly low among women, low income and low education employees. We also find some evidence that personal contributions lead to more knowledge. These results support plan designs that have few investment options and encourage personal contributions.

Research highlights▶ Defined contribution plan participants understand the mechanics of their plans. ▶ However, plan participants cannot differentiate among various investment options. ▶ Results support plan designs with few investment options. ▶ Results support plan designs that encourage personal contributions.