Big banks are beginning to talk openly about the connection between financial literacy and retirement security. This is a significant development that should boost the global effort to raise individuals’ money management skills.
For decades, financial firms have been singularly focused on counseling boomers nearing or already in their retirement years. And why not? That’s where the money is. Boomers control half of net household wealth in the U.S. and will continue to be the U.S.’s wealthiest generation until at least 2030.
Yet by the time people get to retirement there isn’t a lot they can do to improve their nest egg. Financial education remains critical then because individuals must understand how to make any savings last. But the time to really help them, by demonstrating the power of budgets and compound growth, was four decades earlier.
In just the last few months, three of the world’s largest financial institutions have publicly recognized this issue. The world’s largest asset manager, BlackRock; ninth largest bank by assets, Bank of America; and second largest administrator of 401(k) assets, Fidelity Investments have all spoken up on the importance of teaching financial literacy as a means to solving the nation’s retirement savings crisis.
In his most recent annual letter to CEOs of the largest companies in America, BlackRock chairman and CEO Laurence Fink called upon businesses “to empower savers with new technologies and the education they need to make smart financial decisions.”
In a survey, Bank of America Merrill Lynch found that nine in 10 Americans believe financial literacy lessons should be required in high school and that a quarter of those in a 401(k) plan enrolled because of educational material they received on the job. In a press release, Fidelity reported that 401(k) accounts had reached record high balances and contribution rates partly as a result of rising participation in more user friendly workplace financial education programs.
The connection between financial literacy and retirement security has never been made so strongly. With Millennials reaching full-on adulthood the timing for financial firms is right. But another important driver is the clear failure of the old model of saving, where employers offer options and leave it up to workers to sort them out. Nearly half of boomers have zero retirement savings, and of those who have saved only a little more than half have as much as $100,000.
That’s bad. But it could be worse. Many boomers still have lifetime income guaranteed through traditional pensions to soften the blow of meager savings. For the most part, the next generations have no such cushion.
This is where financial education programs, starting in school and continuing in the workplace, can make a difference. Yes, it’s good business for big banks to get young people saving and stir older savers to be more aware of their money habits. But it’s also good practice for individuals to get started early and stick with a saving strategy. With this formal linkage between financial education and retirement security, banks are recognizing that raising individuals’ financial literacy must be part of the solution.