An Empirical Analysis of the Effect of Financial Education on Graduating Business Students’ Perceptions of Their Retirement Planning Familiarity, Motivation, and Preparedness

• Published date: 01 March 2011
• DOI: http://doi.org/10.1111/j.1540-6296.2011.01194.x
• Author: Jonathan M. Hobbs,Mark L. Power,Ashley Ober
• Date: 01 March 2011

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Risk Management and Insurance Review, 2011, Vol.14, No. 1, 89-105

DOI: 10.1111/j.1540-6296.2011.01194.x

PERSPECTIVES ARTICLES

ANEMPIRICAL ANALYSIS OF THE EFFECT OF FINANCIAL

EDUCATION ON GRADUATING BUSINESS STUDENTS’

PERCEPTIONS OF THEIR RETIREMENT PLANNING

FAMILIARITY,MOTIVATION,AND PREPAREDNESS

Mark L. Power

Jonathan M. Hobbs

Ashley Ober

ABSTRACT

Today’s multifaceted and dynamic financial environment requires a high level

of individual financial literacy to ensure that sound financial behaviors are

the norm. Unfortunately, many individuals have limited knowledge regard-

ing financial issues and are ill prepared to make sound financial choices. The

purpose of this article was to benchmark and then determine if graduating busi-

ness students’ perception of their retirement planning familiarity, motivation,

and preparedness improved after taking a semester-long course in Personal

Risk Management and Insurance (PRMI). Wediscovered that business students

were more financially literate than nonbusiness students and that business stu-

dents’ familiarity with retirement plans and personal level of readiness to make

retirement planning decisions improved significantly after taking the principles

class. Specifically,we showed that only 15.8 percent and 42.3 percent of the non-

business and business control students, respectively, felt adequately prepared

to make retirement decisions, while 82 percent of the business students who

completed the PRMI class felt prepared. Ex post, graduating seniors who were

exposed to coursework covering life-cycle risks and options to treat those risks

perceived that they are leaving college with a better ability to meet the finan-

cial challenges that await them. Last, we showed that significant differences

existed in retirement plan and investment familiarity based on gender. Our

findings provide support for including financial literacy as a general education

requirement at colleges and universities.

Mark L. Power is University Professor and Principal Financial Group Finance Professor,College

of Business, 3214 Gerdin Business Building, Iowa State University,Ames, Iowa 50011; phone: 515-

294-5651; fax: 515-294-3525; e-mail: mpower@iastate.edu. Jonathan M. Hobbs is a Ph.D. student in

Statistics at Iowa State University.Ashley Ober was an Honors Student at Iowa State University.

This article was subject to double-blind peer review.

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90 RISK MANAGEMENT AND INSURANCE REVIEW

INTRODUCTION

Financial decision making for individuals has become more complex for several reasons.

Many employers have adopted choice-based total compensation plans, which increase

flexibility but also place more decision-making responsibility on employees. Financial

services, markets, and risks have become more intricate, and as a result, managing per-

sonal finances has become more demanding. Demographic shifts are creating economic

challenges and baby boomers are expected to stress the retirement system and consume

large amounts of costly health care. Today’s multifaceted and dynamic financial environ-

ment requires a high level of individual financial literacy to ensure that sound financial

behaviors are the norm. Unfortunately, many individuals have limited knowledge re-

garding financial issues and are underprepared to make judicious financial choices.

The purpose of this article was to benchmark college student retirement planning fa-

miliarity, motivation, and preparedness and then determine if students’ perception of

their level of readiness to make retirement decisions improved after taking a semester-

long course that focused on strategies and treatments for managing life-cycle risks. A

survey was administered to senior level business students in four different sections of

a Principles of Risk Management and Insurance class (PRMI), with two classes taking

the survey at the beginning of the semester (control group) and the other classes at

the end of the semester (treatment group). Additionally, two nonbusiness courses were

surveyed to expand the scope of the study and provide a more accurate benchmark.

Several important and major findings were discovered. First, we discovered that busi-

ness students in general were more familiar with retirement plans and had ahigher level

of personal readiness to make retirement decisions than their nonbusiness contempo-

raries. Second, our findings showed that business student familiarity with retirement

plans and personal level of readiness to make retirement decisions improved signifi-

cantly after taking the PRMI class. We showed that only 15.8 percentand 42.3 percent of

the nonbusiness and business control students, respectively, felt adequately prepared to

make retirement decisions, while 82 percent of the business students who completed the

PRMI class felt prepared. Ex post, business students who were exposed to coursework

covering life-cycle risks and options to treat those risks perceived that they are leaving

college with a better ability to meet the everyday financial challenges that await them.

Last, we showed that significant differences existed in retirement plan and investment

familiarity based on gender. Our results providesupport for including financial literacy

as a general education requirement at colleges and universities.

The remainder of the article is organized as follows. In the next section, the relevant

literature is discussed and then the methods, study design, and hypotheses are briefly

described. The results section presents differences in the variables tested. We conclude

and summarize in the final section of the article and also suggest areas for future re-

search.

LITERATURE REVIEW

Extant research indicates that many individuals areill prepared to make financial choices

for their retirement. Statistics on retirement preparedness in the United States are quite

startling. Dynan and Kohn (2007) show that the personal savings rate has fallen to an

average of 1.7 percent in the current decade, and in 2005, the U.S. savings rate fell

below zero for the first time since the Great Depression (Edmiston and Gillett-Fisher,