Literacy, Trust and 401(k) Savings Behavior
WP#2007-10
Abstract
At three large firms offering 401(k) plans, we assess the impact of financial literacy and trust on 401(k) savings behavior in voluntary and automatic enrollment 401(k) plans. Financial literacy plays a critical role in improving 401(k) savings behavior — it reduces both the proportion of non-joiners in voluntary 401(k) plans and the proportion of quitters in automatic enrollment plans. Trust is critical as well in improving quit rates in automatic enrollment plans. Both financial literacy and trust appear to have more sizeable marginal effects than do those from income. We also find no initial evidence that non-participants are low-income rational agents who fail to participate in a 401(k) plan due to anticipated income support from Social Security. Our findings underscore the importance of ongoing workplace education for both voluntary and automatic enrollment plans and highlight the unique issue of trust in automatic enrollment plans.
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Julie R. Agnew is an assistant professor of finance and economics at the College of William and Mary. Lisa Szykman is an associate professor of marketing at the College of William and Mary. Stephen P. Utkus is the Principal of the Vanguard Center for Retirement Research. Jean A. Young is a research analyst at the Vanguard Center for Retirement Research. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) to the Center for Retirement Research at Boston College (CRR). The findings and conclusions are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government, the College of William and Mary, Vanguard, or Boston College.