5 Ways Obama Can Improve Financial Literacy
How the next president should handle the growing financial literacy crisis
Posted January 20, 2009
The central concept behind new policy recommendations to boost Americans' financial literacy seems to be this: We're not stupid; we just haven't been taught properly.
With just days left in the Bush administration, the nonpartisan President's Advisory Council on Financial Literacy, chaired by Charles Schwab, has made its recommendations for boosting our financial IQ. President Bush created the council a year ago in response to the fact that many Americans struggle with such basic concepts as calculating interest rates and developing a budget. Because the council serves through 2010, members plan to work with the Obama administration to promote financial literacy.
Key Topics:
The Financial Literacy Crisis
How to Teach Your Kids About Money
Your Inauguration Day Survival Guide
The financial crisis has only escalated the enthusiasm for increased financial literacy, says Ted Beck, a member of the council and president of the National Endowment for Financial Education. "It's one of the greatest teachable moments that's ever happened," he says.
The recommendations are not without controversy: Some financial experts say that rather than emphasizing financial education in schools, the government should focus on simplifying the financial world so that it's not so difficult to navigate.
Here are five of the council's recommendations for improving financial literacy:
Schools should be required to teach financial education from kindergarten through 12th grade.
While research on the impact of financial education has been mixed, the council says schools should adopt money-related curricula. Research by the Charles Schwab brokerage firm has found that many parents don't talk to their kids about money, and only 1 in 3 had taught their teens how to balance a checkbook, for example. "Standards-based financial education in the classroom helps to level the playing field for students whose parents may have faced financial challenges themselves or who may be among the unbanked or under-banked populations," the council says. Currently, only a handful of states require students to take personal finance courses.
In middle school and high school, students should learn the basic concept behind a budget, developing a savings plan, and wants versus needs, says Beck. But he adds that personal finance classes need not replace other coursework. Instead, Beck says, money lessons can be built into existing classes, such as the social sciences and math.
College students should be required to take a course in financial literacy in order to receive federal student loans.
Because college students often build up credit-card debt and take out other types of loans, schools should use the opportunity to teach them about money, the council says. Beck says that students at this level should learn how to buy a home, develop a savings plan, and manage loans.
Employers should receive tax incentives to teach workers about money.
"Financial education is a continuous process," says Beck. "The playing field changes, so you need a continual flow of information that's relevant at that time." That's why workplace programs that can teach employees about saving for retirement, for example, can make a significant difference.
The council says that such programs could boost productivity by reducing stress. "When employees are worried about debt and other personal finance issues, they have more difficulty focusing on their jobs," says the council, adding that one group estimates that employee financial stress costs businesses about $300 billion a year.
The government should create a resource center on its financial literacy website, www.mymoney.gov, for human resources professionals and employers.
With all of the information circulating on the Internet and available in the personal finance sections of bookstores, one might think that people have more than enough resources at their fingertips. But the council says that the government is uniquely position to provide employers with a "one-stop" shop for financial education resources. Other websites can be so numerous that they're "intimidating," the council says, and some may be sponsored by fraudsters.
Financial institutions should be required to provide every adult American with access to a debit-card-accessible bank account.
The council wants the 28 million Americans without bank accounts to get one, largely to protect them from high-interest payday lenders and other risks. "Many people have a history where they're not sure they'd be welcomed by banks," says Beck, so this recommendation is about making sure all consumers have access to a regulated, insured bank account
Tuesday, January 20, 2009
Tuesday, April 22, 2008
Investors don't have to know financial jargon to be informed
CHUCK JAFFE
Straight talk express
Commentary: Investors don't have to know financial jargon to be informed
By Marketwatch, Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
The average investor lives somewhere between "Ignorance is bliss" and "Knowledge is power," and is unsure of just how far they want to go in either direction.
What's more, there's a serious debate in the financial services business about whether an investor should be tilted toward those extremes, or should settle comfortably in the middle.
For proof, consider two recent and very different studies of investors, one concerning knowledge and its ability to provide and create control, and the other about surrendering control, presumably due to a lack of knowledge. When juxtaposed, the two studies make for an intriguing landscape, giving investors food for thought about just what position they want to assume on the financial horizon.
AARP Financial's "MoneySmarts" survey released last week determined that investors are lost in financial jargon. More than 40% of the 1,200-plus people surveyed said that information from financial services providers is "not so [helpful] or not at all helpful."
In addition, more than half of the respondents said they do not read financial literature because "it's too hard to understand." Almost four out of five respondents said they have an easier time understanding prescription drug inserts or car insurance policies than mutual fund prospectuses.
Perhaps most importantly, the survey showed that more than half of the public (52%) confessed to making an investment mistake because they were confused or didn't understand an investment. The most common mistakes cited were failure to invest or waiting too long to invest.
Much to learn
That brings us to the second bit of research, released this week by Financial Engines, which provides independent investment advice, much of it to consumers whose employers provide guidance along with a retirement-savings program.
Financial Engines looked at the percentage of people whose employers enrolled them in a managed account program, and found that an average of 60% stay with the program.
That's a bit disappointing. Nearly two years ago, the Pension Protection Act was supposed to revolutionize retirement savings and ease the nation's savings shortfall. Among its more publicized provisions, the Pension Protection Act encouraged employers to automatically enroll workers in a 401(k) plan and to provide default choices, as well as management assistance.
The Financial Engines study showed that when plan sponsors put existing retirement-plan participants into a managed account program -- one where they get some measure of guidance and asset-allocation help -- a big chunk of those folks back out.
That was not what Congress envisioned, nor what most observers expected. Admittedly, enrollment stays higher for people who are starting a new job and who wind up being automatically put into the plan; industry research shows that closer to four out of five employees stay the course and do not opt out of the retirement-savings plan. Without automatic enrollment, a retirement plan that can convince roughly half of the employees to participate can brag about a high success rate.
Jeff Maggioncalda, Financial Engines' chief executive officer, said that he believes many of the people who opt out of the managed-account program are deciding to follow their own plan, which is not necessarily a bad thing provided they are indeed saving and headed in the right direction. Still, if investors are bamboozled by the financial jargon, there's a real question of whether what they don't know will come back to haunt them.
"Automatic enrollment is supposed to help people, by letting them focus on what they know," Maggioncalda said. "They still have to worry about the big decisions -- how much to save, when to retire, how much risk they can tolerate -- but they let someone else worry about the investments."
Two schools
This is where the schools of thought start to diverge. On the surface, everyone agrees that financial education is a big deal. Regulators extracted millions of dollars from mutual fund firms that got caught up in rapid-trading scandals in 2003 and 2004, and earmarked the funds for investor education (though it's hard to see any real success from those efforts). Mutual fund firms are busy working on a Securities and Exchange Commission initiative to develop a summary prospectus that helps investors get through the clutter.
But since the AARP study compared understanding investments to understanding an auto mechanic, consider how this situation can play out with an investor feeling more comfortable by knowing just a bit less.
Your car is one of your biggest expenditures, one that -- like your financial nest egg -- you want to make last, in good condition, for as long as possible. While you can do your own repairs and know what's necessary to keep the car in good working order, most people don't change their own oil, and are better off focusing on keeping the car serviced properly than wondering about the nuts and bolts under the hood themselves.
Consumers can't afford to be ignorant about how a car works lest they wind up overpaying for repairs or simply running the vehicle into the ground by never getting it serviced. Yet they also don't need to be a trained auto mechanic.
Likewise for investors, who must know the big things -- such as whether they are saving enough, how well they can sleep at night when their assets are exposed to risk, and their time horizon -- but who could leave the finer points of asset allocation to a hired hand.
Yes, investors would be better off if they understood jargon, but if they're not going to take the time to get up the learning curve, then perhaps the most important thing to know is what they don't know.
"People don't need to know every little thing, but they do need to understand what they are doing," said Mac Hisey, chief investment officer for AARP Financial. "The problem is that they get put off by the things they don't know, or don't think they know."
In short, you don't need to be capable of managing a mutual fund in order to invest in one; don't be ignorant, but don't feel like you need an advanced degree in order to make successful choices.
"You don't want to be taken advantage of or have a problem because of what you don't know," said Maggioncalda, "but there are resources out there, ways for people to put together portfolios where they are focused on finding the right professionals or getting the right guidance, and giving the program enough to work with so that they can reach their goal."
Straight talk express
Commentary: Investors don't have to know financial jargon to be informed
By Marketwatch, Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
The average investor lives somewhere between "Ignorance is bliss" and "Knowledge is power," and is unsure of just how far they want to go in either direction.
What's more, there's a serious debate in the financial services business about whether an investor should be tilted toward those extremes, or should settle comfortably in the middle.
For proof, consider two recent and very different studies of investors, one concerning knowledge and its ability to provide and create control, and the other about surrendering control, presumably due to a lack of knowledge. When juxtaposed, the two studies make for an intriguing landscape, giving investors food for thought about just what position they want to assume on the financial horizon.
AARP Financial's "MoneySmarts" survey released last week determined that investors are lost in financial jargon. More than 40% of the 1,200-plus people surveyed said that information from financial services providers is "not so [helpful] or not at all helpful."
In addition, more than half of the respondents said they do not read financial literature because "it's too hard to understand." Almost four out of five respondents said they have an easier time understanding prescription drug inserts or car insurance policies than mutual fund prospectuses.
Perhaps most importantly, the survey showed that more than half of the public (52%) confessed to making an investment mistake because they were confused or didn't understand an investment. The most common mistakes cited were failure to invest or waiting too long to invest.
Much to learn
That brings us to the second bit of research, released this week by Financial Engines, which provides independent investment advice, much of it to consumers whose employers provide guidance along with a retirement-savings program.
Financial Engines looked at the percentage of people whose employers enrolled them in a managed account program, and found that an average of 60% stay with the program.
That's a bit disappointing. Nearly two years ago, the Pension Protection Act was supposed to revolutionize retirement savings and ease the nation's savings shortfall. Among its more publicized provisions, the Pension Protection Act encouraged employers to automatically enroll workers in a 401(k) plan and to provide default choices, as well as management assistance.
The Financial Engines study showed that when plan sponsors put existing retirement-plan participants into a managed account program -- one where they get some measure of guidance and asset-allocation help -- a big chunk of those folks back out.
That was not what Congress envisioned, nor what most observers expected. Admittedly, enrollment stays higher for people who are starting a new job and who wind up being automatically put into the plan; industry research shows that closer to four out of five employees stay the course and do not opt out of the retirement-savings plan. Without automatic enrollment, a retirement plan that can convince roughly half of the employees to participate can brag about a high success rate.
Jeff Maggioncalda, Financial Engines' chief executive officer, said that he believes many of the people who opt out of the managed-account program are deciding to follow their own plan, which is not necessarily a bad thing provided they are indeed saving and headed in the right direction. Still, if investors are bamboozled by the financial jargon, there's a real question of whether what they don't know will come back to haunt them.
"Automatic enrollment is supposed to help people, by letting them focus on what they know," Maggioncalda said. "They still have to worry about the big decisions -- how much to save, when to retire, how much risk they can tolerate -- but they let someone else worry about the investments."
Two schools
This is where the schools of thought start to diverge. On the surface, everyone agrees that financial education is a big deal. Regulators extracted millions of dollars from mutual fund firms that got caught up in rapid-trading scandals in 2003 and 2004, and earmarked the funds for investor education (though it's hard to see any real success from those efforts). Mutual fund firms are busy working on a Securities and Exchange Commission initiative to develop a summary prospectus that helps investors get through the clutter.
But since the AARP study compared understanding investments to understanding an auto mechanic, consider how this situation can play out with an investor feeling more comfortable by knowing just a bit less.
Your car is one of your biggest expenditures, one that -- like your financial nest egg -- you want to make last, in good condition, for as long as possible. While you can do your own repairs and know what's necessary to keep the car in good working order, most people don't change their own oil, and are better off focusing on keeping the car serviced properly than wondering about the nuts and bolts under the hood themselves.
Consumers can't afford to be ignorant about how a car works lest they wind up overpaying for repairs or simply running the vehicle into the ground by never getting it serviced. Yet they also don't need to be a trained auto mechanic.
Likewise for investors, who must know the big things -- such as whether they are saving enough, how well they can sleep at night when their assets are exposed to risk, and their time horizon -- but who could leave the finer points of asset allocation to a hired hand.
Yes, investors would be better off if they understood jargon, but if they're not going to take the time to get up the learning curve, then perhaps the most important thing to know is what they don't know.
"People don't need to know every little thing, but they do need to understand what they are doing," said Mac Hisey, chief investment officer for AARP Financial. "The problem is that they get put off by the things they don't know, or don't think they know."
In short, you don't need to be capable of managing a mutual fund in order to invest in one; don't be ignorant, but don't feel like you need an advanced degree in order to make successful choices.
"You don't want to be taken advantage of or have a problem because of what you don't know," said Maggioncalda, "but there are resources out there, ways for people to put together portfolios where they are focused on finding the right professionals or getting the right guidance, and giving the program enough to work with so that they can reach their goal."
Sunday, April 20, 2008
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