According to this research study which I unearthed from 2014, more financially knowledgeable workers have higher returns on their 401(k) balances.  While not all that surprising, the research was able to quantify how much that knowledge was actually worth.  It also provides a set of five questions that they used to measure financial knowledge that you could use to test your students.

Here’s their summary:

We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers. Their investment portfolios are also somewhat more volatile, exposing them to slightly more idiosyncratic risk.

I highlighted the key insight from their research.  So, what do we need to teach students about investing so they can be knowledgeable and generate that larger 401(k) nest egg?

• Over the long run, stocks outperform bonds and cash so having a higher stock allocation will lead to higher returns
• The further you are from retirement (for example, while you are in your 20s), you should be almost be entirely invested in stocks in your 401(k) plan
• As expected, the more stock you have in your portfolio, the more volatile that it will be which means you better have the psychological temperament to hang on during these volatile periods (think 2008, when at one point markets were down almost 60%).

Since the data analyzed included a company with lots of index funds among their 401(k) options they weren’t able to tease out performance further to see how indexers did vs. those who chose actively managed funds. I think I know what the answer would have been:)

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Additional resources on the research study:

• How to Boost Your 401(k) by 25% (Fortune)
• No Monkey Business (The Economist)

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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