The association between pension plan types and financial literacy in later life

In the U.S., employers are increasingly offering defined contribution (DC) pension plans in place of defined benefit (DB) pension plans to their employees. Yet, research shows that many older employees are financially illiterate and unprepared to manage their pension funds, especially when confronted with a wide variety of financial instruments. The central thesis of this study is that participating in DC plans provides the motivation and opportunity for employees to educate themselves to maximize their pension plan returns. The same motivation is not present for employees participating in DB plans. Cross-sectional analyses of the 2010 Health and Retirement Study (n=1,281) investigated the association between different types of pension plans and multiple indicators of financial literacy. We also examined the moderating effect of gender. Regression results showed respondents with DC plans were more likely to correctly answer a set of financial literacy questions, in comparison with respondents with DB plans. Men with both DC and DB plans scored significantly higher on a financial literacy index than women with both plans, relative to respondents with DB plans only. Results from this study suggested that traditional financial education programs may not be the only means of achieving financial literacy. Our conclusion is that older adults have higher financial literacy if they were incentivized by participation in DC plans to manage financial resources, including deciding where to invest pension funds. This is especially important as research demonstrates that the effectiveness of traditional financial education programs is limite