Educating Participants on Risk Literacy

Participants’ understanding of their retirement plans and individual prospects can be more well-rounded and complete if they are educated on risk literacy, argues an industry expert. 

Risk literacy is a “crucial aspect of participant education” that is often neglected, posits PlanPILOT Managing Director Mark Olsen in a recent blog entry. 

Why This Matters

Olsen argues that educating plan participants about risk matters for a variety of reasons. 

Essential skill. Risk literacy is “an essential part of making sound financial decisions,” argues Olsen, and helps participants to:

• distinguish between investment risks;
• assess how risks might affect their retirement savings;
• better understand concepts such as probability and uncertainty;
• able to analyze the likelihood of various outcomes;
• be more prepared to handle market fluctuations;
• effectively calibrate investments; and
• balance risk and return. 

Resilience. Risk literacy can help participants be resilient when the market is volatile, says Olsen, and increase their financial stability.  

Consequences of ill-equipped participants. Not making participants literate about risk, says Olsen, creates “a blind spot” for participants since they lack critical understanding that will enable them to make choices that account for the risks entailed in making investments. And those risks, he says, affect “the unpredictable terrain of financial markets.” 

Educating Participants on Risk Literacy 

Olsen offers suggestions regarding how plan participants can be educated about risk. 

• Add material on market risk, credit risk, interest rate risk, and risk-return tradeoff to educational materials. 
• Consider using tools, such as:
  • risk simulators;
  • scenario-based activities;
  • real-life examples; and
  • case studies. 
• Evaluate and refine the approach. 
• Conduct assessments or quizzes of participants in order to measure their grasp of the material concerning risk and identify how the educational efforts may be fine-tuned. 
• Foster open dialogue concerning financial risks so participants are comfortable asking questions, expressing concerns, and seeking additional help.

Olsen argues that such an approach can not only educate participants, but also give them the tools to “navigate the financial landscape effectively.”

Opportunity

Plan participants’ poor understanding of risk presents an opportunity, not a step backward, says Olsen—increasing their risk literacy will make them better able to make better financial choices.