The results of a recent survey reveal that most Americans, including retirement plan participants, failed a fluency quiz of key investment selection terms, which can translate into saving less and lower use of investment products.

Hearts & Wallets’ “Financial Fluency: What Consumer Understanding of the Language of Finance Means for Advice, Retirement and Asset Management” finds that only 19% of Americans achieved a passing grade when asked to choose the best answer for seven key investment selection terms that were presented to participants in a national survey of nearly 6,000 U.S. households.

The terms were divided into four basic investment selection terms and three more advanced terms; a passing grade was when respondents selected the best answer for five or more terms. Questions on basic investment selection terms included what’s the best definition of mutual fund, asset allocation, exchange traded fund and cost basis, while questions on advanced terms included the best definition of passive investing, differences between Roth and traditional retirement accounts, and taxable brokerage accounts.

Deterred Participation

Based on the findings, a lack of financial literacy may deter eligible participants from plan participation, Hearts & Wallets further observes. One in three potential participants in workplace retirement plans did not know any definitions for the four basic investment selection terms fundamental to their ability to select investments within plan. In addition, more Americans who are eligible but not participating do not know the best definition for any of the terms versus participants (38% vs. 29%). Amazingly, only 14% of current plan participants correctly answered all four of the questions on basic investment terms.

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