Employees participating in defined contribution retirement plans should have a significant level of financial literacy – that's something with which most employers would agree.
But they would not agree that employers should be required under ERISA to provide financial education to their employees, as proposed by academics at the University of Pennsylvania Law School and George Washington University.
In a paper posted on an academic website in May, the academics urged the Department of Labor to play a central role in improving worker financial literacy by mandating workplace financial education programs and issuing minimum requirements for those programs.
There are several problems with this proposal. First, it would be another burden imposed on employers who have defined contribution plans, or who might be considering offering such a plan. Employers already deal with many rules and regulations under ERISA. They do not need another responsibility, and such a mandate could be the straw that breaks the camel's back for some of those with plans, and a deterrent for those considering doing so.
In fact, such a mandate might encourage employers with defined contribution plans to consider dropping them and joining state- or city- sponsored plans for private-sector employees such as those offered by California and Oregon, if those plans survive a possible federal challenge.
Second, what level of financial literacy would be mandated? Financial literacy is commonly defined as "people's ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt and pensions." Basic financial literacy involves the understanding of concepts such as inflation, compound interest and time value of money. More sophisticated financial literacy involves an individual's knowledge on the functioning of stock market, the risk-return relationships and risk diversification.
If the proposed federal standards required both levels of financial literacy, they could cost employers and vendors significant amounts to bring their programs into line with them.
Third, while employees in defined contribution plans need financial education, many, perhaps most, are offered opportunities for that education by employers and financial service providers. Unfortunately, research suggests many employees do not take advantage of the opportunities. This likely explains the finding by researchers that workplace-only investors (those who do not invest outside their retirement plan) have "strikingly low levels of financial literacy." Mandating that employers provide such education programs will not change that.
Fourth, the proposal would do nothing to help the 50 million to 70 million private-sector employees who do not have an employer-sponsored retirement savings plan. They need a financial literacy program more than employees with such plans.
A number of studies have found that those who are financially literate save more, and one found that people who study economics in high school are more likely to invest in stocks than those who don't.
This suggests that instead of mandating financial education in the workplace, it should be mandated in high school. However, according to the Center for Financial Literacy, only 11 states require students to take 15 or more hours of personal finance education, while only eight require between seven and 13 hours. The remaining states have lower or no financial education requirements. The states with little or no requirement for such education in high school include some of the wealthiest, including California, Connecticut, Delaware, Massachusetts and Pennsylvania, plus the District of Columbia. School-based financial education is where the solution to financial illiteracy lies, not with employers.
Unfortunately, studies show that most teachers feel they are not trained to teach financial literacy. This should be remedied, and school-based financial education should be spread nationwide before an additional burden is placed on employers.
