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Why Financial Literacy is a Growing Concern



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 Why Financial Literacy is a Growing Concern 
 
To better understand why low financial literacy is a growing concern, one need only look 
at the trends of employer pension plans. As employer pension plans have shifted from Defined 
Benefit (DB) to Defined Contribution (DC) plans, the need for financial literacy has become 
even more important to help achieve a comfortable retirement (Lusardi, 2008; Martin, 2007). DB 
plans typically guarantee a systematic pension payout at retirement age, thereby relieving the 
employee of the need to apply financial knowledge, investment management, and proper savings 
behavior to help secure needed retirement income. The management of the pension plan assets is 
handled by a plan administrator in coordination with the employer. Under a DC plan, employers 
only promise to contribute a specified amount or percentage of wages towards an employee’s 
designated retirement account. However, unlike DB plans, DC plans shift the required 
investment related allocation decisions, and the determination of needed contribution amounts, 
from the employer to the employee (Martin, 2007).  


 

Identification of the proper savings levels and projection of future retirement benefits 
now become the responsibility of the employee, who may lack the basic understanding of several 
important financial concepts required for making proper calculations (Lusardi, 2008). Retirement 
savings and income projection calculations are among the most financially complex decisions 
ordinary Americans will encounter (Bayer, Bernheim, & Scholz, 2008). Many pension plan and 
investment providers have tools to help project and simplify some of these calculations, but basic 
understanding of financial concepts is still needed for proper decision making. Employees will 
become increasingly more responsible for their own financial well-being, which places an 
increasingly greater importance on the need for financial literacy (van Rooij, Lusardi, & Alessie, 
2011).  

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