An Empirical Analysis of the Effect of Financial Education on Graduating Business Students’ Perceptions of Their Retirement Planning Familiarity,Motivation, and Preparedness

Today's multifaceted and dynamic financial environment requires a high level of individual financial literacy to ensure that sound financial behaviors are the norm. Unfortunately, many individuals have limited knowledge regarding financial issues and are ill prepared to make sound financial choices. The purpose of this article was to benchmark and then determine if graduating business students’ perception of their retirement planning familiarity, motivation, and preparedness improved after taking a semester‐long course in Personal Risk Management and Insurance (PRMI). We discovered that business students were more financially literate than nonbusiness students and that business students’ familiarity with retirement plans and personal level of readiness to make retirement planning decisions improved significantly after taking the principles class. Specifically, we showed that only 15.8 percent and 42.3 percent of the nonbusiness and business control students, respectively, felt adequately prepared to make retirement decisions, while 82 percent of the business students who completed the PRMI class felt prepared. Ex post, graduating seniors who were exposed to coursework covering life‐cycle risks and options to treat those risks perceived that they are leaving college with a better ability to meet the financial challenges that await them. Last, we showed that significant differences existed in retirement plan and investment familiarity based on gender. Our findings provide support for including financial literacy as a general education requirement at colleges and universities.     

Worries and plans as individuals approach retirement

The primary objective of an employment-based retirement plan is to provide a secure and adequate income for workers throughout retirement. In the defined contribution (DC) framework, asset accumulation is a means to the end, but not the end. Drawing retirement income from savings and paying for health care expenses in retirement are the two issues that concern individuals the most as they approach retirement. This article examines the attitudes of near-retirees regarding these risks and their plans for managing them. The author discusses how DC plan design can have a major impact on how individuals convert their retirement savings to retirement income; differences in survey responses between those who have consulted a financial advisor or other financial professional and those who have not; and the role of trust in implementing advice.     

A Comparative Analysis of Financial Professionals’ Perception of the Level of Graduating Business Student Retirement Planning Familiarity,Motivation, and Preparedness

Academic, government, employer, and individual interest in personal financial literacy have mushroomed as financial decision making has become more complex, costly, and less paternalistic. Financial illiteracy in America manifests in many ways, including low levels of personal saving, high levels of personal debt, negative financial wealth, a decline in standard of living, and increased demand on social safety networks. For college students, of particular concern is the high level of public and private debt accrued while working toward a degree. It is important to understand how prepared households are for retirement planning decisions and which factors can improve their preparedness. We show that financial education is impactful in reducing financial illiteracy, and provides evidence that taking a personal risk management and insurance course helps to prepare college students to make retirement decisions. Second, we provide evidence that life stage explains differences (similarities) in how professionals self‐rate the importance, familiarity, and motivation to plan and save for retirement versus their opinion on how vital the questions should be to students. Finally, additional evidence is provided showing that demographic characteristics explain differences in the importance and motivation to plan and save for retirement and in the familiarity that respondents have with retirement planning and saving products.     

Facing the new facts of retirement income adequacy

A range of new factors is responsible for the current problem with insufficient retirement resources. Changes inside and outside the organization share partial responsibility, as do employee behaviors. In addition, other factors simply have been overlooked as employers and employees think about retirement income adequacy. The authors describe the current situation, discuss the significant risks it creates for both employers and employees and advise employers on what they should do to help employees build a more secure future in retirement.     

Our Retirement in Their Hands: A User Perspective

This paper reports on a survey of Australian retirees' attitudes to financial planning advice before, at or after retirement. The results demonstrate that, despite government initiatives aimed at enhancing consumer confidence in the financial services market, most retirees feel dissatisfied with, and lack confidence in, the services provided by their financial advisers. This suggests an increased role for financial planners in providing not only the additional information required under government policy, but also information that is understandable and useful to retirees.     

Employer involvement in defined contribution investment education

In this paper the authors consider the personnel problems that may arise for defined contribution plan sponsors if major market corrections cause older employees to delay retirement beyond previous expectations. We move from that basic premise to argue that, given the continued evolution from defined benefit (DB) to defined contribution (DC) retirement plans, employers need to be more "proactive" in educating their employees about their retirement planning. A human resources perspective is used to support this argument, apart from and in addition to legal considerations such as ERISA Section 404(c). Specifics of employer involvement and its place as a component of an organization's culture are discussed. Finally, recommendations are given for employers to consider.     

Risk Allocation in Retirement Plans: A Better Solution

The corporate world is reconsidering the cost‐effectiveness of defined benefit pension plans while contemplating a change to defined contribution plans. This article begins by examining the three primary risks faced by sponsors of most DB pension plans—investment risk, interest rate risk, and longevity risk—and shows how shifting these risks to employees through a DC plan would affect both the corporation and the individual. Although DC plans clearly help companies manage risks, they provide at best an incomplete solution for individual participants. This article describes an innovation in pension design—the Retirement Shares Plan (RSP)—that combines many of the best features of DB and DC plans. An RSP provides:

• ? predictable and stable cost to the plan sponsor, with little chance of unfunded liabilities;
• ? lifetime income, guaranteeing that retirees will never outlive their benefits;
• ? a benefit accrual pattern comparable to that of traditional pension plans that preserves value for older, long‐service employees; and
• ? potential inflation protection for retirees.

The RSP accomplishes this by allocating risk to sponsors and individuals differently than either a traditional DB plan or a DC plan. Unlike most DB plans, the RSP shifts investment and interest rate risks from plan sponsors to participants. Unlike DC plans, the RSP keeps longevity risk with the sponsor.     

Quality of life aspirations: Exploring baby-boomer financial means-end goal structures

Motivated by industry concerns that baby-boomers are neglecting to plan for an eventual retirement, this study examines perceptions about the importance of financial means in contributing to their quality of life. Framed by means-end chain analysis and scholarship in consumer evaluations of life satisfaction, a number of theoretical expectations are empirically confirmed. Findings indicate that financial means are not high in the order of life domains that contribute to respondent quality of life. Retirement planning relies predominantly on compulsory superannuation contributions from employers, with the assumption that this would provide sufficient income to maintain their current lifestyle. Prior to retirement, respondents reported being more preoccupied with funding children's education costs and home mortgage payments. They also wished to avoid the embarrassment of approaching a financial planner until they had a reasonable sum that required more skilful investment advice. Finally, it was revealed that gender had an influence on the priority given to financial means and subsequent decisions to seek financial planning advice. These findings confirm the importance for financial planners to determine the core motivations and subordinate means through which baby-boomers envisage achieving quality of life on the journey into retirement.     

Retirement planning and long-term risk

Many defined contribution plan participants have available to them various measures of short-term risk. However, some of these participants don't understand that reducing short-term risk comes at the cost of increasing the risk of not reaching their retirement income goal. This article looks at the relationship between short- and long-term risk and their impact on retirement savings.     

A Review of Major Influences on Employee Retirement Investment Decisions

The recent retirement plan debacle of the Enron employees has caused regulators and lawmakers to think about new ways to protect and help retirement plan participants. When investigating participant investment decisions, researchers have traditionally studied the retirement plan characteristics and employee characteristics. More recently, some researchers have extended the analysis to social influences, such as social norms and peer affects. Others have expanded into behavioral finance and examined the role of various psychological biases. This paper combines and summarizes these four sets of influences so that researchers and policy makers can better understand all the influences affecting an employee when making retirement plan contribution and investment decisions.     

The Status of Social Security and Its Role in Retirement Planning: A Professional Advisor's Perspective

Currently, one of the more salient retirement debates surrounds the future insolvency of the Social Security retirement system. In spite of the important role that financial planning professionals play in the retirement and private-savings decisions that individuals make, no research has focused on assessing the opinions of this group. This study uses a survey approach to assess the opinions of financial planning professionals regarding the problems faced by the Social Security retirement system, the solutions that have been proposed thus far, and the use of Social Security benefits in the financial planning process.     

Does retirement planning affect the level of retirement satisfaction?

This paper analyzes the relationship between retirement planning and retirement satisfaction. Do individuals think about and plan for retirement? If they do, do they utilize financial planning services? If they plan, are they more satisfied with retirement than those who did not? Data for 1,781 retired individuals from the first wave of the Health and Retirement Study (HRS) are analyzed using an ordered probit model. The results indicate that thinking about retirement and attending planning meetings have a significant positive impact on satisfaction even when income, wealth, marital status and health are included as explanatory variables.     

Issues for Implementing Phased Retirement in Defined Benefit Plans

Abstract

U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.

This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.

The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.     

Helping tomorrow's retirees manage "distribution phase" risks

Much of employers' attention has focused on helping employees manage the accumulation of 401(k) plan assets rather than on helping them manage the distribution phase--the period during which employees begin drawing down their 401(k) savings to meet their retirement needs. Assisting employees in managing the distribution phase can play an important role in helping employers meet a range of workforce planning goals and ensuring a maximum return on the retirement dollars that have been invested by both employees and the company. By implementing a properly structured approach to help employees manage the distribution phase, employers can help them maximize the value of their retirement savings at little or no employer cost, thanks to the leverage of the company's group purchasing power and the tax advantages of employer-sponsored plans.     

The appropriateness of default investment options in defined contribution plans: Australian evidence

For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with low or moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant's wealth accumulation target at retirement as well as downside risk of falling below that target outcome by aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth.     

Understanding Pensions: Cognitive Function,Numerical Ability and Retirement Saving*

In a world of declining state pension provision, it is becoming increasingly important that individuals are able to understand the financial choices they face and can choose savings products, portfolios and contribution rates accordingly. In this paper, we look at numerical ability and other dimensions of cognitive function in a sample of older adults in England and examine the extent to which these abilities are correlated with various measures of wealth and retirement saving outcomes. As well as finding that relatively large fractions of the older population can be seen to have low levels of numeracy, we show that numeracy levels are strongly correlated with measures of retirement saving and investment portfolios, even when controlling for other dimensions of cognitive ability as well as educational attainment. Numeracy is also related to knowledge and understanding of pension arrangements, and with perceived financial security. In the short run, there may be a role for targeting simple retirement planning information at low‐numeracy, low‐education groups; a longer‐run goal for retirement saving policy might be to improve numeracy levels more generally.     

Insurance Company Employees' Financial Expertise and Practices: Implications on Benefit Participation and Satisfaction

Employers continue to shift financial decision-making responsibility for employee benefits to employees. This article examines employees' financial practices, financial expertise, and levels of benefit participation and overall satisfaction. We show that there are significant differences in employees' financial practices and financial expertise based on socio-demographic characteristics. While levels of benefit satisfaction and employer ranking are high, significant differences in how employees feel toward their employer exist. Employees more highly value traditional benefits than nontraditional benefits, but satisfaction with benefits was high regardless of take-up rate. We also find that respondents are more knowledgeable over experiential financial concepts than more specific financial concepts like qualifying conditions for a traditional individual retirement account. Employer-sponsored financial education programs, which increase employee understanding of employer-provided benefits and their importance to employees' financial well-being, should improve overall employee satisfaction, loyalty, and productivity.     

Comparing Costs and Risks of Retirement Plans for Sponsors

This stochastic simulation analysis compares funding costs and volatilities for private sponsors of traditional defined benefit (DB), pension equity (PE), cash balance (CB), and defined contribution (DC) retirement plans. Plan provisions of equivalent benefit generosity in the different plan types are determined. The modeling includes current funding requirements and practices as well as a comprehensive set of uncertainties in asset and labor markets. The results show that costs and risks for sponsors vary significantly with plan types, investment and funding strategies, and participant demographics. The hybrid PE and CB plans exhibit characteristics of cost efficiency, as in the DB plan, and risk reduction, as in the DC plan, for plan sponsors under conventional investment strategies. These features are more saliently observed in the CB plan, but it is also more difficult to implement effective asset–liability management strategies for it.     

Sounds great, but what's in it for me? Helping employees understand their role in the retirement planning process

The communication of retirement plans by employers to their workers has greatly improved, but in many cases still falls short of getting employees to understand their roles in planning for their own retirement. The author states that a well-designed personalized retirement savings education program encourages employees to take ownership of their retirement plan. Three employee profiles are examined in the context of the personalized retirement education process.