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April 2005 · Volume 87 · Number 3
On RetirementThe Value of EducationFor years, there has been growing evidence that a great many Americans are not doing an adequate job of managing their personal financial situations, including their investment and retirement planning programs. As the population ages-especially the enormous baby boomer generation-it is increasingly clear that millions of people are ill prepared for retirement. In addition, surveys show that people generally lack confidence in their ability to make informed decisions about their personal finances and investments, and that a lack of time and knowledge is a significant contributing factor. Education seems to be a big part of the problem, but it may also open the path toward a longer-term solution. Alan Greenspan, chairman of the Federal Reserve, noted recently, "No matter who you are, making informed decisions about what to do with your money will help build a more stable financial future for you and your family." His sentiments were echoed by Dr. Edward Gramlich, a member of the Board of Governors of the Federal Reserve System, when he said, "Americans of every income and educational background want additional tools and training to address the complexities of personal finance." The belief that people need help with the complexities of personal finance is not only the opinion of experts but also of the public. Baby boomers say they lack confidence in their money management skills. In an American Association of Retired Persons 2004 poll, 27 percent of boomers surveyed said they were worse at handling money than their parents. Clearly, public employees want and need more help in managing not only their retirement plans but also their financial affairs in general. Often, employees look to their employers for help with retirement planning, and employers also assume a measure of fiduciary responsibility for their employees' retirement security. Public managers, therefore, have been looking to their plan providers for more effective ways to better educate their public sector employees. One answer is making education part of an integrated program that starts with understanding individual needs and requirements, developing products and services that respond to these needs, and incorporating personalized education programs addressing these same needs and requirements. What is distinctly different about this approach is that, by linking education programs through personal education, it offers the potential to transform participants into better investors, retirement planners, and financial managers. In the long term, we are seeking to:
One solution to the diversification issue may be target-date funds, now available to public sector employees who are uncomfortable with managing their own investments. Investors simply pick a fund close to when they want to retire or begin withdrawing funds. Fund managers furnish a diversified portfolio, automatic rebalancing, and automatic asset allocation. The end-goal is to allow investors to obtain the information they need and desire in a way that is most comfortable for them. More important, public managers and plan providers will be helping to elevate the level of financial literacy and to empower individuals and families to better plan and manage their financial affairs. It is said that education is a lifelong process. Elevating people's knowledge levels and transforming their habits will come but only as the result of a long-term effort of public managers and plan providers. It is a formidable task but one in which we can look forward to making progress in the years ahead. —Joan McCallen |
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