Background: This week's Research Minute delves into the complexities of education strategies aimed at helping participants understand guaranteed lifetime income (GLI) solutions based on their varying levels of financial knowledge. In this study, besides investigating how the general financial knowledge of DC participants (including their self-assessed knowledge levels and objective test scores) affects their understanding of annuity products, we specifically examined whether working with a financial advisor strengthens or weakens the positive influence of financial literacy on comprehending annuity products. This is the second part of a two-part series.

Findings: We observed a diminishing return from general financial knowledge of annuity literacy when a financial advisor is involved (Figure 1). This underscores that those with lower levels of financial knowledge are more likely to experience greater benefits of financial advice in improving annuity literacy than their counterparts with above-average financial knowledge.

Figure 1: Predicted Annuity Literacy Across Objective Financial Knowledge Score

Source: Korankye, T., Sun, Q., & Pandey, S. (2024). The Role of Financial Advisors in Promoting Annuity Literacy: Insights into the Moderating Effect of Financial Knowledge – working paper.

Remarkably, for individuals who have a strong subjective belief in their financial knowledge, working with a financial advisor may hinder their understanding of annuity products (Figure 2). Past research indicates that overconfidence bias often makes it more challenging for these individuals to seek out financial advisors or to adopt their advice, even if they maintain an ongoing relationship with one. Figure 2: Predicted Annuity Literacy Across Subjective Financial Knowledge Assessment

Source: Korankye, T., Sun, Q., & Pandey, S. (2024). The Role of Financial Advisors in Promoting Annuity Literacy: Insights into the Moderating Effect of Financial Knowledge – working paper. Bottom line: Providing targeted financial education programs or financial counseling services can significantly benefit less knowledgeable individuals by helping them understand and ultimately adopt GLI solutions. For individuals with high financial knowledge, a more appropriate approach may involve building trust in the employer and then simply disclosing detailed product information. Most importantly, for over-confident individuals, the first step is to help them become aware of their actual knowledge level and recognize their need for further education.

Insights shared by guest contributors are their own and do not represent the views of DCIIA or the RRC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.