Raising the financial literacy of retirement system participants has long been a goal of plan sponsors, but a survey finds that those most confident about their abilities might come out behind those with less assurance.
The survey of 5,000 defined contribution plan participants by the National Association of Retirement Plan Participants found the 20 percent who were overconfident about their knowledge ended up with with smaller account balances than those more unsure of themselves.
This group put less money from each paycheck aside for retirement than the group in the middle. They were also more likely to purchase products.
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The overconfident group did have some good points going for it. For instance, they were more likely to contact recordkeepers for guidance and more likely to take action in their portfolios. That last trait might be the one that opens them more to losses than their less confident peers.
On the other end of the spectrum are the 23 percent who are underconfident about their financial knowledge. They tended to invest in funds that were unlikely to generate big returns but, like the turtle racing the hare, in the long run their account balances came out ahead.
By being indecisive they tended to take a conservative approach that likely offered more protection from the market ups and downs.
Younger plan participants were more likely to be overconfident than older workers.
Also of concern is the 44 percent of plan participants who said the investment choices they were offered are too complicated.
When it comes to understanding financial literacy, less than half of those surveyed understood common terms like fixed income, risk, diversification and others. More men than women knew the definition of each by 8 percentage points or more.
The survey also found, as has other research, that men are more prepared for retirement than are women. For instance, 53 percent of men said they had calculated how much money they would need compared to 39 percent of women.
About one-third of men expressed confidence they would have adequate funds to live on, while about 25 percent of women responded that way.
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