A Comparative Analysis of Financial Professionals’ Perception of the Level of Graduating Business Student Retirement Planning Familiarity, Motivation, and Preparedness

• Date: 01 September 2015
• Published date: 01 September 2015
• DOI: http://doi.org/10.1111/rmir.12044

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2015, Vol.18, No. 2, 273-295

DOI: 10.1111/rmir.12044

PERSPECTIVE

ACOMPARATIVE ANALYSIS OF FINANCIAL

PROFESSIONALS’PERCEPTION OF THE LEVEL OF

GRADUATING BUSINESS STUDENT RETIREMENT PLANNING

FAMILIARITY,MOTIVATION,AND PREPAREDNESS

Mark Power

Jonathan M. Hobbs

ABSTRACT

Academic, government, employer, and individual interest in personal financial

literacy have mushroomed as financial decision making has become more com-

plex, costly, and less paternalistic. Financial illiteracy in America manifests in

many ways, including low levels of personal saving, high levels of personal

debt, negative financial wealth, a decline in standard of living, and increased

demand on social safety networks. For college students, of particular concern

is the high level of public and private debt accrued while working toward a

degree. It is important to understand how prepared households are for retire-

ment planning decisions and which factors can improve their preparedness.

We show that financial education is impactful in reducing financial illiteracy,

and provides evidence that taking a personal risk management and insurance

course helps to prepare college students to make retirement decisions. Second,

we provide evidence that life stage explains differences (similarities) in how

professionals self-rate the importance, familiarity, and motivation to plan and

save for retirement versus their opinion on how vital the questions should be

to students. Finally,additional evidence is provided showing that demographic

characteristics explain differences in the importance and motivation to plan and

save for retirement and in the familiarity that respondents have with retirement

planning and saving products.

INTRODUCTION

Academic, government, employer, and individual interest in personal financial liter-

acy have mushroomed as financial decision making has become more complex, costly,

and less paternalistic. Although today’s multifaceted and dynamic financial landscape

requires financially astute actors, most experts report low levels of personal financial

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

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

294-5651; fax: 515-294-3525; e-mail: mpower@iastate.edu. Jonathan M. Hobbs received his PhD in

statistics at Iowa State University and is now a postdoctoral researcher at NASA’s Jet Propulsion

Lab working on uncertainty quantification for remote sensing applications.

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274 RISK MANAGEMENT AND INSURANCE REVIEW

literacy and an inadequate understanding of basic retirement knowledge and planning.

Consequently, many individuals areunderprepared to make prudent and timely finan-

cial choices during their life cycle. Financial illiteracy in America manifests in many

ways, including low levels of personal saving, high levels of personal debt, negative

financial wealth, a decline in standard of living, and increased demand on social safety

networks. For college students, of particular concern is the high level of public and pri-

vate debt accrued while working toward a degree. Reducing levels of personal financial

illiteracy through financial education should improve individuals’ financial behaviors,

resulting in greater understanding of financial situations, earlier and improved retire-

ment planning, and increased future wealth.

The growing body of research on financial literacy1provides the motivation for this

article, and of particular interest is an article written by Power et al. (2011). The au-

thors benchmark graduating college students’ level of financial literacy and then show

that taking a semester-long course in personal risk management and insurance (PRMI)

significantly improved students’ financial understanding, preparedness to make finan-

cial decisions, and motivation to save for retirement when compared to nonbusiness

students and business students who did not take the PRMI course. Several sugges-

tions were made by the authors regarding future research, two of which—expanding

the study to include nonstudents and capturing perceptions regarding life-cycle risks,

benefits options, and educational interventions—are explored in this article. Because re-

tirement planning responsibility has shifted to individuals, it is important to understand

how prepared households are for such decisions and which factors can improve their

preparedness.2

In general, we find that students are not deficient in their familiarity and knowledge

of retirement (financial) products. When ratings were significantly different, students

reported that they were more literate than financial professionals felt they needed to be.

Financial professionals’ perception of students’ motivations and students’ motivation

to plan and save for retirement were similar. Both groups valued employment-based

retirement plans, employer contributions to the plan, and neither group viewed student

debt as a disincentive to plan and save for retirement. We use the sum of our findings

as a certification proxy for PRMI course design regarding student preparednessto make

retirement-related choices, familiarity with retirement benefit options, relative motiva-

tion to plan/save for retirement, and vocational preparedness.Evidence is also provided

that life stage explains differences (similarities) in how professionals self-rate the impor-

tance, familiarity, and motivation questions to plan and save for retirement versus their

opinion on how impactful the questions should be to students. The questions that pro-

fessionals rated as more important to them than students, such as retirement planning

and determining an ideal retirement standard of living, can be explained from a human

and financial capital perspective. Professionals, on average, are in the blended stage of

the life cycle with declining human capital, increasing financial capital, and a shrink-

ing planning horizon, whereas graduating students’ largest asset is their human capital

(ability to earn) and time, which explains, for example, why professionals indicate that

1A brief review of the literature on financial literacy is provided in the next section of this article.

2We would like to thank an anonymous reviewer for suggestions regarding the importance of

this research and structure of the introduction.