Financial Literacy and Workplace-Only Investors

A new report from the Global Financial Literacy Excellence Center sheds some light on how workplace-only investors differ from others.  The report identifies workplace-only investors as persons "who only have retirement accounts through their employers."  These are people who do not invest outside of these workplace-affiliated accounts.  They account for about 15% of the total population studied in the report.  As a group, about 53% of workplace-only investors are women.  In contrast, the report identifies active investors as persons who have investment accounts in addition to any workplace accounts.  This accounts for 43% of the population studied.  Another 42% simply don't have any investments--employment or otherwise.

The report finds that financial literacy levels differ by type of investor and that a financial literacy gap exists between active investors and workplace-only investors.  While most people get basic asset-pricing questions wrong, "workplace-only investors exhibited an even lower understanding of asset pricing." They also exhibited lower understanding on diversification questions.

More and more people now find themselves automatically enrolled in retirement accounts.  They begin to regularly invest this way with each pay period.  It doesn't surprise that many people who have invested this way do not develop the same level of financial literacy as others who invest more actively.

The findings make me consider whether the basic account opening forms used by brokerage firms accurately capture the true experience of investors.  Someone who accumulated securities in a 401k for 20 years might be classified as having 20 years of investing experience.  Yet a workplace-only investor probably should not be treated as an experienced investor simply because an employers automatic retirement savings plan accumulated securities for 20 years.  It may make sense to break these workplace-only investors out from active investors on account opening forms.