The Role of Financial Education in the Management of Retirement Savings

Abstract

We investigate the role of financial education in the management of Defined Contribution retirement savings plans. We survey Finance and English professors from universities across the United States and compare the management of their savings in the TIAA-CREF® plans. We find that compared with English professors, Finance professors allocate a larger share of their retirement savings to equities, they manage their retirement portfolios more actively, and they are less likely to practice naïve diversification strategies.

Keywords:

• Retirement portfolios
• Behavioral finance
• Financial education
• Asset allocation
• Household savings

Notes

1. See www.bls.gov for details.

2. http://www.bls.gov/opub/perspectives/issue3.pdf

3. Brinson, Hood, and Beebower [1986] show that over 90% of the volatility in portfolio returns can be explained by asset allocation.

4. We posit that if a person has done his PhD in finance, he knows that there are higher long-term returns from equity investments and that there are benefits from active portfolio management. We therefore compare two groups which have attained the same level of education but differ in their education in finance. Finance is more mathematical in nature and hence we choose the second group from the nonscience areas, and the best choice is “Arts and Languages.” To get an adequate sample size for our research, we select English professors as they have the largest population amongst the Arts and Languages faculties in the United States.

5. See Benartzi and Thaler [2001] for a detailed description of these strategies.

6. We also received email responses from some of the subjects citing reasons why they are unable or unwilling to participate. The reasons include being ill, being on sabbatical, being too busy to participate, and having privacy concerns.

7. TIAA-CREF is the largest manager of defined contribution retirement plans for employees of educational organizations.

8. The number of respondents is less than the total sample since we only include those respondents who provide useable information on their actual Equities allocation.

9. We thank an anonymous referee for making this suggestion.

10. To conserve space we do not include the tables for these robustness tests but they are available from the authors on request.