Yesterday we wrote a quick post talking about the very real challenge facing the financial services industry. In short, how we do we provide the average individual investor with a workable retirement solutions. Or as DFA CEO David Booth states it “cost-efficient integrated lifetime financial solutions to the average person.”

In a recent post Felix Salmon at Reuters talks about how individual investors, on average, were harmed as their savings shifted over time from defined benefit to defined contribution plans. The problem is that shift has occurred in a world where financial literacy, as we describe in our book, is “abysmal.” I am going to quote liberally from Salmon’s piece because it makes a number of important points.


It is unrealistic to rely on the financial services industry for literacy education. It is a bit like leaving the fox in charge of the hen house. It is unlikely to work.


The other point is important as well. A little financial literacy can in an ironic fashion actually leave individuals with MORE overconfidence that before. Statistics show that individual investors are reliably poor at timing their investments.  Salmon has a solution:


Unfortunately I think Salmon overestimates the extent of companies that still have a legacy defined benefit plan in place. Employees in the public sector have much higher coverage rates. The other problem is that which we face with health care. A large percentage of Americans now get their health care insurance from their employer. This causes all manner of behaviors that don’t lend itself to better health outcomes. Do we really want to make ourselves dependent on our employer with another key financial relationship? I guess most Americans would be wary of this. Salmon continues:


Salmon is right that there is a great, unmet need for low cost financial solutions. The vast majority of Americans don’t want to be mucking about with their own portfolios. Saving enough for retirement is according to a Gallup poll American’s biggest financial worry. A savings solution that Americans feel was fair, inexpensive and realistic would be a major step forward, but it is unlikely to be piggybacking on their employer’s pension plan. The question is what is the solution and where does it come from?