Summary of Results - Union College



Survey of Financial Literacy among Union College Faculty and Staff

Brief Summary of Results:

Seven Things Union Employees Don’t Know but Probably Should

We sent out over 700 email surveys to faculty and staff with a Union email account. We also campus-mailed over 250 hard copies to staff without a Union email account. We received a total of 280 completed surveys (247 electronic and 33 hard copies). About 100 participants identified themselves as faculty (mostly from Division III) with the rest either administration or staff. Women accounted for over 60% of the respondents.

For each respondent we calculated the percentage of correctly answered questions in section II of the survey. The average percentage of correctly answered questions is an alarmingly low 41%. This means a failing grade for over three quarters of the participants. Those with high incomes and education (even controlling for each other) did better, as did men compared to women. Controlling for education and income, there were no differences across academic divisions, age, or faculty vs. staff.

There are some bright spots in the results. Nearly 80% of Union employees understand that their benefits depend on their contributions and those of the college, and how well these contributions perform.[1] Over 80% of employees understand the advantages of tax-deferred savings. More than half know they may change their asset allocations at any time using the providers’ websites. More than half also know that life-cycle funds gradually shift into safer assets as retirement approaches.

Below we list the questions on which participants struggled. They are listed in the order of their potential importance to one’s financial well being. In parentheses we refer to the relevant survey questions. Please do not construe any of this as investment advice. We think we got it right but don’t hold us to it. If you have any concerns or comments, or if you would like references for some of the facts, please contact us.

Seven Things Union Employees Don’t Know but Probably Should

1. You can lose money investing in government long-term bond funds. (q.12) More than 40% of participants answered that “you can’t lose money” investing in long-term government bonds. This is not the case. Although long-term government bonds are considerably safer than stocks or corporate bonds, you can lose money. This is because prices of long-term bonds are highly sensitive to movements in interest rates. When interest rates rise, bond prices fall. The only sure way not to lose money on a government bond is to hold an individual bond until maturity. However, this is not an option within our (or any other) retirement plan. We find the lack of understanding of long-term government bond funds particularly alarming given that currently long-term interest rates are at their historical lows. This means that bond prices are at their historical highs. Participants seeking safety may be investing in such funds falsely thinking that they are buying a safe asset.

2. Fees lower your investment return. (q.6) Only 28% of participants understand that a fund’s expenses are subtracted from your assets. 13% believe that they are applied only to gains. Funds charge their expenses regardless of whether the fund gains or loses money. These expenses (for management fees and administrative costs) are inside the “market fluctuations” that you see in your statements. An expense ratio of 1% lowers your annual return by one percentage point. Since some funds charge significantly more than others (from 0.1% to 2%), it is important to be mindful of expense ratios.

3. Equity means stocks. (q.9) Only 24% of participants understand that an S&P 500 index fund is a “domestic equity” type of asset. This is important because the enrollment packets for both TIAA-CREF and Fidelity propose various asset allocations using terms such as “domestic equity,” “fixed income,” etc. Plan participants then must choose among a myriad of funds with names that do not correspond to the proposed allocations. The low scores on this question show that a majority of participants may not be able to match the proposed asset allocations to individual funds.

4. Variable annuities are much like mutual funds. (q.7) 56% of participants said that they did not know the difference between a variable annuity and a mutual fund. An alarming 20% of the participants thought that value of a variable annuity could never decline below the sum of the contributions. Only the TIAA Traditional Annuity has a guaranteed return. The rest of the annuities offered through TIAA-CREF are variable annuities which - just like mutual funds – can decline in value. The difference between a variable annuity and a mutual fund is that a variable annuity offers more options for withdrawing money upon retirement (such as lifetime income). Given that participants face the choice between variable annuities and mutual funds (even within TIAA-CREF), and given that expenses are generally lower for mutual funds, it is important to understand the difference.

5. Index funds follow the market, managed funds try to beat the market (but on average don’t). (q.14) Only 46% of participants understand the difference between managed and indexed funds. This is important since both providers (TIAA-CREF and Fidelity) offer both “managed” and “index” funds. Participants must make a choice, but it is not clear on what basis they do so. Academic studies find that on average, only about a quarter of actively managed funds outperform the market.

6. Roth contributions could make sense if your future tax rates will be higher. (q.15) Less than 15% of participants correctly answered the question on the difference between a Roth and a traditional IRA. Low income participants who currently face low or zero income tax rates may benefit from contributing to a Roth rather than a traditional tax-deferred account. Given that Union plans to allow Roth contributions, knowing the benefits of Roth vs. traditional is important.

7. Distinguishing between “value” and “growth” probably doesn’t matter. (q.13) More than half of the participants answered that they don’t know the difference between “growth” and “value” stocks. Moreover, one third answered that “growth” stocks outperform “value” stocks. If anything, according to some data “value” stocks outperform “growth” stocks, but the returns have been similar in recent decades. “Growth” stocks are generally expected to have a faster growth in earnings. “Value” stocks are supposed to be attractively priced, i.e. have a low stock price relative to their earnings. Not knowing the difference between “value” and “growth” means that participants do not know what they are investing in. Both TIAA-CREF and Fidelity (and every other provider) categorize stock funds as either “growth,” “value” or “blend” (a mixture of the two). Again, the basis on which participants decide are not clear.

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[1] This is not the case in national surveys of financial literacy which show that one third of workers don’t know whether their plan is a defined contribution or defined benefit.

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