The Problem(s) with Financial ‘Literacy’

April is, of course, National Financial Literacy Month—and for as long as I can remember, the retirement industry has been talking about the need for some kind of personal finance education in public schools—there’s just one problem.

First off, there actually are such programs already in existence at the moment. Half the country (25 states) now requires high school students to take a course in economics, and 21 states now require high school students to take a course in personal finance. Granted, they may still be too well dispersed to show up on your normal “radar”—but they’re growing in number and dispersion. 

Those efforts[i] notwithstanding—and while there’s some anecdotal evidence that this has helped (some) with regard to better decisions with regard to college financing—I’ve little sense that it’s moved the needle much with regard to participant knowledge or financial decision making (feel free to disagree in the comments below, if you’ve had a different experience—or if you haven’t).

In fact, a 2014 paper by from three professors reviewed 168 different papers[ii] covering some 200 studies on the topic of financial literacy and financial education—and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

Or said another way, “not much.” 

A more recent paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” echoes those findings, concluding, “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?”, only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.”

While the findings in those two studies have some limitations—not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) - as someone who has long been one of those voices advocating for greater financial literacy—this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t[iii] these programs—why isn’t financial literacy—taking root in a meaningful way?

Turns out there might actually be a reason.

The researchers who had examined those 200+ studies did offer a perspective: “like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention,” they write.

In fairness, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded—because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point (beyond passing the exam, and ensuring that I would never again have to consider the subject—particularly among the classes I was required to take. Might that be the case with these personal finance offerings? It seems reasonable. 

So, what can we do? 

Well, considering that the time gap between that high school personal finance class (if there is one, and I’m not sensing any movement to require such things on college campuses) and employment is frequently longer than 20 months, it’s little wonder that the needle hasn’t moved much, certainly not as much as one who is trying to engage with these individuals in financial planning might wish. Rather, as the researchers note, “There must be some immediate opportunity to enact and put to use knowledge or it will decay. Moreover, without a ready expected use in the near future, motivation to learn and to elaborate may suffer.” 

Said another way, you have to “use it or lose it.”

The paper offers some possible remedies. Specifically, they suggest that future education might be more productively focused on teaching “soft skills like propensity to plan, confidence to be proactive, and willingness to take investment risks more than content knowledge about compound interest, bonds, etc.” They note that in their meta-analysis, “measured knowledge of financial facts had a weak relation to financial behavior….” Which, I have to say, seems to validate my sense of the inadequacy of current financial “literacy” measures. 

They also suggest that content knowledge “may be better conveyed via ‘just-in-time’ financial education tied to a particular decision, enhancing perceived relevance and minimizing forgetting.” They acknowledge that it “may be difficult to retrieve and apply knowledge from education to later personal decisions… particularly decisions coming years after the education.” The authors of the second paper cited suggest additional mathematics training, which they found “leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.”

All of this seems to suggest that our industry needs to quit holding out as some panacea the notion that financial education programs in school will “solve” the 401(k) education problem.[iv] However, that doesn’t mean we should abandon those efforts, certainly not in core areas like budgeting, debt management and saving. 

The “problem” with financial literacy may well be that many still lack that exposure—but more significantly that even for those who get that exposure, there’s been little opportunity for applying that personal finance knowledge in high school and college, though arguably it shouldn’t be.

In sum, true financial “literacy” is perhaps not so much whether you can talk the talk—but being given both the knowledge—and the opportunity - to walk that walk.

- Nevin E. Adams, JD

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[i] Another problem in evaluating the impact is defining what constitutes “financial literacy” in the first place. Noted academics have boiled that complicated concept down to three fairly fundamental questions—though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

[ii] The reference list alone runs 26 pages! And there are more to go with the multiple appendices.

[iii] At this point, I’ll align my opinion with that of the authors of the second paper: “Our findings do not necessarily imply that financial literacy does not matter, or that financial education is never effective.”

[iv] Not that it wouldn’t help to slip in some basic understandings of the markets and investing alongside those math problems about two trains heading toward each other at variable speeds.

Does Health Care Need a Behavioral Finance ‘Fix’?

An important decision, made in minutes.

No, that’s not retirement plan savings—though various consumer surveys have suggested that many spend more time mapping out their annual vacations than how they’ll fund their retirement needs. 

Rather, that’s how a new whitepaper by Voya’s Thought Leadership Council and SAVVI Financial LLC characterizes the 17 minutes that the average employee spends enrolling in benefits—including health plan selection, voluntary benefits and more. 

Now, in fairness, health care plan choices are, in my experience, less complicated that those associated with retirement. Not that they aren’t complicated, mind you—and there’s certainly concern associated with that choice (and “do overs” are hard to come by). But I suspect for most they are really “only” choosing between two, or at most three, different options—essentially packages carefully constructed by their HR groups (likely with the assistance of a benefits broker). 

When it comes to that individual decision—that choice between packages—anecdotally, at least, it seems often driven by a couple of key considerations: coverage of one’s physician(s) of choice—and cost. With regard to the latter, it is often focused on one particular aspect—premiums—though, as we’ll see in a minute, co-pays and deductibles can also factor in. Regardless, the choice is almost inevitably a “here and now” decision—one that has financial consequence, to be sure—but one that requires only that one look out no further than the year ahead. 

Or does it? That’s ultimately the premise behind that new whitepaper, “Retirement at Risk: The Relationship Between Overspending on Health Care and Retirement Readiness.” The whitepaper’s authors point out that it is a (short-term) decision with long-term consequences—and one that, with the growing consensus of the important links between health and wealth, bears consideration.

The paper basically presents the mathematical consequences of spending (too much) on health care versus how those savings could add up if instead invested for retirement. The math is—well, math. You could apply those financial choices to just about any individual financial decision and the trade-offs represented. 

But where things get interesting is the apparent rationale behind those choices—which, based on spending data, would appear to be somewhat “irrational.”

Simplistically, behavioral finance—something that has been employed so successfully in retirement plans to provide better outcomes—has yet to be applied to health care decisions. For example, the paper notes that when plans were branded to include the phrase “high deductible,” almost two-thirds of study participants chose the PPO plan, despite the fact that the high-deductible plan used in the study scenario was the more optimal financial choice. Strip out that label, and participants were just as likely to pick the plan formally known as high-deductible as the traditional Preferred Provider Option (PPO) plan (47% versus 53%)—because, after all, who wants a “high” deductible? 

The other challenge, of course, is that these HDHPs are (still) the “new” option. And here, as with retirement savings, inertia proves to be a powerful force. In fact, the paper cites a study that found that 89% of study participants… just chose the same plan they had in the previous year.[i]

In fact, while health care (and health insurance) costs have surely been rising, the paper echoes not only the conclusions, but the causations highlighted in “What’s Holding Back HSAs?”, a whitepaper the Plan Sponsor Council of America published in 2019. 

Now, in a perfect, rational world, folks would sit down and ponder the likelihood of filing a medical claim during the coming year—and perhaps think about the out-of-pocket costs if they did. They’d be aware that in 2018, nearly 60% of employees had less than $2,000 in claims—and, according to the Voya whitepaper, approximately 16% had no claims at all. They might even know that, according to a study published in the Quarterly Journal of Economics, the majority of employees at a Fortune 100 company who chose the plan with the lowest deductible—despite the premium costs—ended up spending 24% more on health insurance than they “needed” to. 

That, of course, is not the world we live in—and, helpful as the data presented in the Voya report is—well, health needs and health insurance costs tend to loom large(r) as a here-and-now concern that frequently trumps the (relatively) distant obligations of retirement. The Voya report should serve as a reminder that health care and health care costs are, and should be, an integral part of planning for retirement—and one that can, and should, be part of our current planning as well.

And for those for whom it isn’t yet, a reminder that applying some structural changes a la behavioral finance could help us all make better decisions about health—and retirement—and health care costs in retirement.

- Nevin E. Adams, JD

See also: 5 Ways to a Better HSA.

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[i] Indeed, a recent study by the Employee Benefit Research Institute (EBRI) and Greenwald Research found that 32% of those with a traditional health plan did not know whether they were offered an HDHP.