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Financial knowledge and 401(k) investment performance: a case study

Published online by Cambridge University Press:  25 November 2015

ROBERT CLARK ,
ANNAMARIA LUSARDI  and
OLIVIA S. MITCHELL
ROBERT CLARK
Affiliation:
Poole College of Management, NC State University, Box 7229, Raleigh, NC 27695, USA (e-mail: [email protected])
ANNAMARIA LUSARDI
Affiliation:
The George Washington University School of Business, 2201 G Street, Suite 450E, Duquès Hall, Washington, DC 20052, USA
OLIVIA S. MITCHELL
Affiliation:
Wharton School, University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH, Philadelphia, PA 19104, USA
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Abstract

We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared with their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18% points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared with their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the financial literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or non-systematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.

Keywords

G11D12D14J32Financial literacyinvestment returnsretirement saving plans
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Special Issue 3: Financial Knowledge and Key Retirement Outcomes , July 2017 , pp. 324 - 347
Copyright
Copyright © Cambridge University Press 2015 

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