State “Capital”

I recently had the opportunity to attend The National Financial Capability Study Roundtable, where a variety of researchers (including EBRI’s Sudipto Banerjee) presented, discussed, and challenged a variety of research papers on topics ranging from financial literacy and retirement planning to financial advice, and from financial literacy and financial behavior to “Prohibition, Price Caps and Disclosure”.  Taken as a whole, the day’s discussions focused on ways to better understand and measure the factors that appear to influence individual behaviors regarding their finances. 

Simply stated, financial literacy is generally described as the ability to understand finance.  More recently, some have begun to focus on financial capability1.  Research has shown that people with higher levels of financial literacy approach retirement with much higher levels of wealth.  However, a growing body of research also suggests that most Americans have limited knowledge about concepts such as inflation, compound interest, and risk diversification at a time when they face an increasingly complex financial planning process alongside an expanding set of saving, investment, and decumulation options. 
Drawing on data from the National Financial Capability Study (NFCS)2, designed by the FINRA Investor Education Foundation (an ASEC member firm), Dr. Banerjee’s report3 noted that the chances of having a bad financial behavior decreases with age, and that the chances of exhibiting a bad financial behavior go down with education and income.  Interestingly enough, full-time and part-time workers, homemakers, sick or disabled, and unemployed or laid-off individuals were all more likely to have bad financial behavior than self-employed people. 
That said, the report specifically examined the role of where you live – specifically the state in which individuals live – in explaining financial literacy and behavior. It also ranked all U.S. states in terms of financial literacy and financial behavior of its residents.
Financial literacy and financial behavior are strongly associated with an individual’s age, income, education and other demographic characteristics.  The study shows that, after controlling for the effect of these individual demographic characteristics, most bottom-ranked states had a statistically significant effect on their residents’ financial literacy and almost all states have a statistically significant effect on their residents’ financial behavior.  However, the chance of exhibiting “worse” financial behavior increased as the financial behavior ranking dropped.
According to the report, this suggests that there might be factors shaping individual financial literacy and behavior other than individual demographic characteristics – and they might be influenced by the state in which people live.
-          Nevin E. Adams, JD

1  The National Financial Capability Study identifies four key components of financial capability as (1) making ends meet, (2) planning ahead, (3) managing financial products, and (4) financial knowledge and decision-making.  See http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf   
2 The National Financial Capability Study is available online at http://www.finrafoundation.org/programs/p123306
3 Banerjee’s paper, including the state rankings, is online at https://custom.cvent.com/09056B0B33C34EC2BECC8C4A235B766F/files/event/51EB0D7B12344774B422F6A615E9B8B9/0c08c7cd98d74c01bf954ad368275ff4.pdf. 

See also “How Do Financial Literacy and Financial Behavior Vary by State?” in EBRI Notes, November 2011 at http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4936 

 

Comments

Post a Comment

Popular posts from this blog

Is the 401(k) Really a ‘Horrible’ Retirement Plan?

Image
  A recent “news” post about a blog post finds some curious “faults” with the 401(k). The news item carried the provocative title “ ‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan .” It originally ran on GoBankingRates.com, but was subsequently picked up in syndication on Yahoo Finance (at least). For the uninitiated, Robert Kiyosaki is one of those “I’ll help you get rich the way I did” types, providing that road map via books (notably “Rich Dad, Poor Dad”) and seminars. He offers comparisons to decisions made by his dad (poor dad) in contrast to those of the father of his best friend (rich dad).  Suffice it to say that his dad worked hard and saved the old-fashioned way—which is NOT his advice to you. That’s included previous pearls of wisdom like “ Why Saving Money is the Wrong Way to Prepare for Retirement .” Apparently rather than saving for retirement, we’re supposed to “look for an investment that will pay for your desired standard of living. Ma
Read more

4 Fiduciary Resolutions for 2024

Image
  A brand new year awaits us – and with the New Year comes an opportunity to assess and reassess – for some when, resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are some for plan fiduciaries for 2024 – that could benefit plan outcomes for years to come.  See if your target-date options are over-weight(ed)     Flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms – nearly all of which (despite marketing brochures to the contrary) appear to share very similar views as to what an appropriate glidepath is supposed to look like – and nearly all of which have embraced the notion that a target-date is little more than a speed bump along the “through” target-date glidepath.    A tar
Read more

Does Your 401(k) Need ‘Guardrails?’

Image
A new WSJ op-ed says that 401(k)s “too often lead employees to make financially harmful mistakes.”  And yes, advisors are (apparently) part of the problem. The “problem”—at least according to the op-ed authors is that, left to their own devices participants are said to be inclined to overindulge in bad investment choices; choices they claim are the result of plan sponsors’ ignorance of how their workforce is actually using the options—an ignorance born of advisors failing to provide that information. Advisors, they comment, who “don’t have any financial incentive to provide such information, or to design plans in ways that would tend to reduce diversification mistakes to begin with.” Now I can’t speak for every advisor, but I know plenty who are actually devoting a fair amount of time and energy to tracking—and sharing, certainly in the aggregate—the asset allocation decisions of the participants in the plan with the plan committee. Beyond that, no small number of par
Read more