Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-05T22:25:17.489Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial knowledge and 401(k) investment performance: a case study

Published online by Cambridge University Press:  25 November 2015

ROBERT CLARK ,
ANNAMARIA LUSARDI  and
OLIVIA S. MITCHELL
ROBERT CLARK
Affiliation:
Poole College of Management, NC State University, Box 7229, Raleigh, NC 27695, USA (e-mail: [email protected])
ANNAMARIA LUSARDI
Affiliation:
The George Washington University School of Business, 2201 G Street, Suite 450E, Duquès Hall, Washington, DC 20052, USA
OLIVIA S. MITCHELL
Affiliation:
Wharton School, University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH, Philadelphia, PA 19104, USA
Get access Rights & Permissions [Opens in a new window]

Abstract

We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared with their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18% points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared with their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the financial literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or non-systematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.

Keywords

G11D12D14J32Financial literacyinvestment returnsretirement saving plans
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Special Issue 3: Financial Knowledge and Key Retirement Outcomes , July 2017 , pp. 324 - 347
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Austin, P. C. (2011) An introduction to propensity score methods for reducing the effects of confounding in observational studies. Multivariate Behavioral Research, 46: 399–424.CrossRefGoogle ScholarPubMed
Behrman, J., Mitchell, O. S., Soo, C., and Bravo, D. (2012) Financial literacy, schooling, and wealth accumulation. American Economic Review, Papers and Proceedings, 102(3): 300–304.CrossRefGoogle ScholarPubMed
Bernheim, D., Garrett, D., and Maki, D. (2001) Education and saving: the long-term effects of high school financial curriculum mandates. Journal of Public Economics, 80: 435–565.CrossRefGoogle Scholar
Bodnaruk, A. and Simonov, A. (2014) Do financial experts make better investment decisions? Journal of Financial Intermediation. Available online 5 October 2014.Google Scholar
Bricker, J., Kennickell, A. B., Moore, K. B., and Sabelhaus, J. (2012) Changes in U.S. family finances from 2007 to 2010: evidence from the survey of consumer finances. Federal Reserve Bulletin 98(2).Google Scholar
Brown, J. R., Kapteyn, A., and Mitchell, O. S. (2013) Framing and claiming: how information-framing affects expected social security claiming behavior. Journal of Risk and Insurance. Available on line 10 July 2013.Google ScholarPubMed
Calcagno, R. and Monticone, C. (2015) Financial literacy and the demand for advice. Journal of Banking & Finance, 50: 363–380.Google Scholar
Calvet, L. E. and Sodini, P. (2014) Twin picks: disentangling the determinants of risk-taking in household portfolios. Journal of Finance, 69(2): 897–906.CrossRefGoogle Scholar
Calvet, L., Campbell, J., and Sodini, P. (2007) Down or out: assessing the welfare costs of household investment mistakes. Journal of Political Economy 115: 707–747.Google Scholar
Calvet, L., Campbell, J., and Sodini, P. (2009 a) Fight or flight? Portfolio rebalancing by individual investors. Quarterly Journal of Economics, 301–348.Google Scholar
Calvet, L., Campbell, J., and Sodini, P. (2009 b) Measuring the financial sophistication of households. American Economic Review, Papers and Proceedings, 99(2): 393–398.Google Scholar
Cattaneo, M. D. (2010) Efficient semiparametric estimation of multi-valued treatment effects under ignorability. Journal of Econometrics, 155: 138–154.Google Scholar
Choi, J., Laibson, D., and Madrian, B. (2010) Why does the law of one price fail? An experiment on index mutual funds. Review of Financial Studies, 23(4): 1405–1432.CrossRefGoogle ScholarPubMed
Christelis, D., Jappelli, T., and Padula, M. (2010). Cognitive abilities and portfolio choice. European Economic Review, 54(1): 18–38.Google Scholar
Clark, R., Maki, J. A., and Morrill, M. S. (2014) Can simple informational nudges increase employee participation in a 401(k) plan? Southern Economics Journal, 80(3): 677–701.Google Scholar
Cole, S. and Shastry, G. (2009). Smart money: the effect of education, cognitive ability, and financial literacy on financial market participation. HBS Working Paper 09-071.Google Scholar
Collins, J. M. (2012) Financial advice: a substitute for financial literacy? Financial Services Review, 21: 307–322.Google Scholar
Deuflhard, F., Georgarakos, D., and Inderst, R. (2014) Financial literacy and savings account returns. Unpublished Working Paper, Goethe University of Frankfurt.CrossRefGoogle Scholar
EBRI (2013) Few get paid advice – fewer take it. Fast Facts, July 3: 236.Google Scholar
Fama, E. F. and French, K. R. (1993) Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33: 3–56.Google Scholar
FINRA Investor Education Foundation (2013). Financial capability in the United States. Report of findings from the 2012 National Financial Capability Study. http://www.usfinancialcapability.org/downloads/NFCS_2012_Report_Natl_Findings.pdf Google Scholar
Grinblatt, M., Keloharju, M., and Linnainmaa, J. (2011) IQ and stock market participation. Journal of Finance, 66(6): 2121–2164.CrossRefGoogle Scholar
Haliassos, M. and Bertaut, C. (1995) Why do so few hold stocks? Economic Journal 105, 1110–1129.Google Scholar
Hastings, J., Mitchell, O. S., and Chyn, E. (2011) Fees, framing, and financial literacy in the choice of pension managers. In Mitchell, O. S. and Lusardi, A. (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 101–115.Google Scholar
Jappelli, T. and Padula, M. (2013 a) Consumption growth, the interest rate, and financial literacy. CSEF Working Paper no. 329. University of Naples.Google Scholar
Jappelli, T. and Padula, M. (2013 b) Investment in financial literacy and saving decisions. Journal of Banking and Finance, 37: 2779–2792.Google Scholar
Kim, H. H., Maurer, R., and Mitchell, O. S. (2015) Time is money: life cycle rational inertia and delegation of investment management. NBER Working Paper 19732.Google Scholar
Lusardi, A. (2011) Americans’ financial capability. NBER Working Paper 17103.Google Scholar
Lusardi, A. and Mitchell, O. S. (2007) Baby boomer retirement security: the roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54(1): 205–224.Google Scholar
Lusardi, A. and Mitchell, O. S. (2008) Planning and financial literacy: how do women fare? American Economic Review, 98(2): 413–417.Google Scholar
Lusardi, A. and Mitchell, O. S. (2009) How ordinary consumers make complex economic decisions: financial literacy and retirement readiness. NBER Working Paper 15350.Google Scholar
Lusardi, A. and Mitchell, O. S. (2011 a) Financial literacy and planning: implications for retirement wellbeing. In Mitchell, O. S. and Lusardi, A. (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 17–39.Google Scholar
Lusardi, A. and Mitchell, O. S. (2011 b) Financial literacy and retirement planning in the United States. Journal of Pension Economics and Finance, 10(4): 509–525.Google Scholar
Lusardi, A. and Mitchell, O. S. (2011 c) Financial literacy around the world: an overview. Journal of Pension Economics and Finance, 10(4): 497–508.Google Scholar
Lusardi, A. and Mitchell, O. S. (2014). The economic importance of financial literacy: theory and evidence. Journal of Economic Literature, 52(1): 5–44.Google Scholar
Lusardi, A., Mitchell, O. S., and Curto, V. (2010) Financial literacy among the young. Journal of Consumer Affairs, 44(2): 358–380.Google Scholar
Lusardi, A., Michaud, P.-C., and Mitchell, O. S. (Forthcoming) Optimal financial literacy and wealth inequality. Journal of Political Economy.Google Scholar
Poterba, J., Venti, S., and Wise, D. (2014). Health, education, and the post-retirement evolution of household assets. Journal of Human Capital 7(4): 297–339.Google Scholar
Tang, N., Mitchell, O. S., Mottola, G., and Utkus, S. (2010) The efficiency of sponsor and participant portfolio choices in 401(k) plans. Journal of Public Economics, 94: 1073–1085.CrossRefGoogle Scholar
Todd, P. E. (2014) Advanced Microeconometric Techniques and Applications. Unpublished manuscript, University of Pennsylvania.Google Scholar
van Rooij, M., Lusardi, A., and Alessie, R. (2011) Financial literacy and stock market participation. Journal of Financial Economics, 101(2): 449–472.CrossRefGoogle Scholar
von Gaudecker, H.-M. (2015) How does household portfolio diversification vary with financial sophistication and advice? Journal of Finance, 70(2): 489–507.Google Scholar
Yoong, J. (2011) Financial illiteracy and stock market participation: evidence from the RAND American life panel. In Mitchell, O. S. and Lusardi, A. (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 76–97.Google Scholar