Financial literacy, not information simplicity, fuels good decision making

This is one time where KISS (keep it simple, stupid) isn’t the answer, according to a new study from Texas Tech University.

The study used a hypothetical employer-sponsored 401(k) plan and looked at how the presentation of financial planning information impacts retirement-savings behavior. Researchers did not expect to find that simplifying the information did not increase plan enrollment rates among either group studied: new employees earning more than $50,000 and business school students.

Instead, those who make bad retirement savings decisions do so because they’re financially illiterate, not because the information provided them is too complex. In the report, Charlene Kalenkoski, director of the Retirement Planning and Living Research Initiative in the Texas Tech University Department of Personal Financial Planning, is quoted saying, “The goal of this research was to investigate whether simplifying retirement plan information provided by employers would encourage employees to participate in retirement plans and to make good decisions regarding how much to contribute and how to invest those contributions.”

Financial literacy has become a buzzword lately, and for good reason. It affects quality of life now, as Americans busy themselves accumulating and paying off debt – and it affects the quality of their future, influencing decisions on jobs, parenthood, housing, and, of course, retirement.

And, as a new study published in the journal Medical Care puts forth, financial literacy might even affect whether a person is more likely to be hospitalized.

In the study, Bryan D. James, PhD, et al assessed the financial literacy of participants who were part of the ongoing Rush Memory and Aging Project and matched scores with Medicare records participants had made available. There appeared to be a correlation between higher financial literacy scores and fewer hospitalizations. They concluded, “Although clearly an indicator of health status, hospitalization can be the product of complex decision making processes” including being able to weigh financial considerations.

The ability to make good decisions is key to good financial health. As Texas Tech’s Kalenkoski explained, “Our results support financial literacy as an important factor in retirement decisions.” People make bad decisions on contribution rates and investment choices, “because they do not know what good choices are.” Simplifying the data people were provided with and offering recommendations on contribution percentages and the differences between investing in stocks and in bonds didn’t spur them to more or different choices, either. They were more likely to choose the defaults.