Do Financial Literacy and Mistrust Affect 401(k) Participation?

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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 those from income. We also find no initial evidence that participants are low-income rational agents who fail to participant 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.