Survey_FWF_2016

Abstract

We examined financial literacy in the context of a specific investment decision – choosing investments in a 401(k) plan. Drawing upon our prior work, we constructed a web-based interface that allowed subjects to allocate a hypothetical $10,000 among ten investment options as part of a 401(k) plan. Subjects were told to assume that they were not going to be retiring for at least 30 years, and that an algorithm would simulate their portfolio’s value at the end of thirty years based on their investment choices. They were incentivized to maximize the value of their portfolio by being told that they would be paid a percentage of their portfolio’s total value at the end of thirty years. Our investment options included a bank savings account, a money market fund and eight domestic mutual funds. Each of the options was modeled upon a real world example. We provided our subjects with an allocation page that listed all ten funds along with a label of their investment type (i.e. equity index fund). The study offered the subjects the opportunity to obtain more detailed information by clicking through a series of user-initiated links. Clicking on a fund name provided the subject with a brief description of the fund and four additional links labeled performance, holdings, risk and fees. Clicking any of the four links revealed simplified fund-specific information derived from the attributes of the real world analog on which the fund was based. The click-through structure allowed us to track the precise information accessed by each subject. After our subjects completed the allocation exercise, we asked them to answer a series of questions including demographic information, attitudes about investing, questions about their objectives while completing their allocation and questions seeking to assess their financial literacy. We describe the financial literacy analysis in more detail below. At the end of the questionnaire we calculated a predicted value of the selected portfolio, using an algorithm to simulate the performance of each of our investment options over thirty years.60 Our algorithm relied on basic assumptions about the long term return for each asset class and adjusted those returns to reflect the quoted fees of each of the options in our menu. The value of a subject’s portfolio was heavily influenced by the investment decisions. A portfolio that was invested 100% in the FDIC insured bank account would have had a value of $13,478.49 at the end of the thirty year period. A portfolio that was invested 100% in our low cost equity index fund would have had a value of $132,676.78. Accordingly, our subjects’ investment choices potentially affected the value of their portfolios, and their own incentive payment, by a factor of 10.