Human Resources News & Insights

Only 1 in 3 employees actually understands how their 401(k) works

When it comes to common financial vehicles like 401(k) plans, term life insurance, Roth IRAs and 529 college savings plans, most workers could use some education on the finer points.  

In fact, according to a recent study by The Guardian Life Insurance Company of American, one-third or  less of employees said they had a solid understanding of the most common financial products.

Problem areas

Here is the specific breakdown from the Guardian Life study on the percentage of worker that said they have a solid understanding of various financial products:

  • 401(k)s and other workplace retirement plans (just 32% of workers said they had a solid understanding)
  • IRAs apart from Roth IRAs (27%)
  • Individual stocks and bonds (26%)
  • Mutual funds (25%)
  • Pensions (25%)
  • Roth IRAs (24%)
  • Term life insurance (23%)
  • Separately managed accounts (23%)
  • Disability insurance (23%)
  • 529 college savings plans (23%)
  • Whole life insurance (22%)
  • Business insurance, such as key person insurance or buy/sell agreements (20%)
  • Annuities (19%)
  • Universal life insurance (19%), and
  • Variable universal life insurance (18%).

Education vs. no education

One of the best ways to help workers garner a better understanding of their finances — and the financial products available to them — is through one-on-one education.

Consider this example:

The Principal Group compared the saving habits and financial acumen of workers who attended a one-on-one session the organization offered one year to those who didn’t.

What it found: Contribution rates for those who attended the session were 9% higher than those who didn’t. Also, 19% of the workers who received education opted to automatically bump up their retirement plan increases with pay increases, compared to just 2% of other employees.

Also, 92% of the employees who were enrolled in Principal’s education program agreed to take a number of positive financial steps, and 80% of those workers followed through on those steps.

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