Certified Plan Sponsor Professional (CPSP) Practice Exam

What impact can financial literacy have on retirement plan participants?

1. It can lead to decreased savings rates.

2. It allows for better investment decisions.

3. It minimizes the need for financial advisors.

4. It affects only high-income individuals.

The correct answer is: It allows for better investment decisions.

Financial literacy plays a crucial role in empowering retirement plan participants to make informed decisions about their savings and investments. When individuals possess a good understanding of financial concepts, they are better equipped to assess their options and understand the implications of their choices. This capability enhances their ability to select appropriate investment products and strategies, leading to potentially better long-term outcomes for their retirement savings. With improved financial literacy, participants are more likely to grasp the nuances of asset allocation, risk tolerance, and the importance of diversification. This not only helps them to optimize their investment performance but also encourages proactive engagement in their financial planning, which is essential for building a secure retirement. The other options do not accurately capture the beneficial effects of financial literacy on retirement planning. While it may seem that financial literacy could reduce the perceived need for financial advisors, it typically complements their expertise rather than minimizes the need altogether. Additionally, financial literacy is not exclusive to high-income individuals; it benefits people across all income levels by enhancing their ability to manage financial resources effectively. Lastly, rather than leading to decreased savings rates, increased financial literacy generally correlates with higher savings and investment participation.