Trust in Financial in Financial Institutions Boosts Retirement Account Sales

The average level of trust was 6.31 for people, 5.58 for financial institutions and 4.83 for government programs.

With all other factors held constant, a 1-unit increase in a survey participant's trust in financial institutions correlated with a 6% increase in the probability of having some kind of retirement arrangement and a $17,800 increase in household net wealth.

A 1-unit increase in a survey participant's trust in government programs correlated with a 4% decrease in the probability of having a retirement account and a $8,900 decrease in household net wealth.

"People who trust financial institutions exhibit more financial behaviors conducive to retirement security, whereas those who trust government programs are less likely to save and investment for retirement," the researchers wrote in the paper. "While trust in public programs can promote confidence in the broader system, our findings also suggest that it could have a detrimental effect on personal financial decisions, by reducing private incentives to save."

What it means: Advisors who want clients to save more for retirement might want to find ways to increase clients' confidence in the insurers and asset managers that provide the retirement savings and investment products.

The paper: Rosen and her colleagues posted their paper behind a login wall on the website of the National Bureau of Economic Research.

A working paper is a research paper that has not yet been through a full peer review process.

The research details: The researchers obtained the survey data by adding an extra module to the 2020 Health and Retirement Survey of Americans ages 50 and older.

Earlier studies have connected measures of trust in people with retirement planning and saving, the researchers said.

The researchers believe their approach to measuring trust in financial institutions and government programs is new.

"Trust is broadly understood as the expectation that individuals, institutions, or systems will act fairly, reliably, and in alignment with established norms, especially under uncertainty," the researchers wrote. "More broadly, trust can promote investment and collaboration by reducing perceived risks in economic interactions."

The researchers also looked at a measure of financial literacy on survey participants' financial behavioral, by getting data on participants' performance on a popular three-question test of financial literacy.

With all other factors held constant, a 1-unit increase in a survey participant's financial literacy score correlated with an increase of about 20% in the likelihood of the survey participants having a retirement account and an increase of more than $30,000 in net household wealth.

Trust in financial institutions and financial literacy appeared to have separate effects on people's efforts to prepare for retirement, the researchers said.

Trust in financial institutions and financial literacy did not correlate closely with age, and trust in financial institutions was only loosely correlated with the survey participants' level of financial literacy, according to the paper.

"Policies that enhance transparency, reduce frictions in interacting with financial institutions, or build confidence in private retirement products may increase the effectiveness of financial education," the researchers said.