Risk & Compliance

Straight Talk on Financial Literacy

Christopher Cox and Ben Bernanke testify before a Senate committee on investor-education efforts at the SEC and the Fed.
Marie LeoneMay 24, 2006

What do Green Day and Christopher Cox have in common? Both the raucous rock band and the Securities and Exchange Commission chairman see podcasting in their future.

Cox, who testified Tuesday on financial literacy before the Senate Committee on Banking, Housing, and Urban Affairs, said that the commission is testing its own investor-education podcasts — audio files delivered over the Internet and played on PCs or on handheld devices like iPods (hence the name). The SEC, elaborated Cox, hopes to spread the word, especially to younger Americans, about personal finance (in its podcast “Welcome to Your Money”) and offer cautionary advice about stock scams (“Hot Stock Tips”). (Presumably, the commission also hopes to counterbalance the carefree financial worldview of the rocked-out generation, such as the title track to Green Day’s best-known album, “American Idiot.”)

Ben Bernanke, chairman of the Federal Reserve Board, joined Cox in testifying about their agencies’ roles in educating and protecting investors. Though it received little attention on Tuesday, some sort of corporate participation, someday, also seems likely.

Cox called for annual reports and mutual fund prospectuses to be written in “plain English,” reiterating a message he delivered to the committee in April. Earlier this month he beat the drum again, when he announced an SEC crackdown on investment scams that target the elderly, as well as beefed-up education efforts in cooperation with the North American Securities Administrators Association.

Cox also repeated his plug for XBRL (eXtensible Business Reporting Language), a means of tagging financial data that, he said in a speech last December, “will do for business reporting what bar coding did for product distribution.” On Tuesday, Cox reaffirmed his belief that reports written in plain English, and incorporating XBRL, would be “more meaningful and intelligible to the average investor.”

Bernanke, who told senators that the Fed is reexamining the Federal Deposit Insurance Corp.’s consumer-protection rule, Regulation Z, to see that lending fees and terms are fairly represented, was pressed on this point by committee chairman Richard Shelby (R-Ala.). Shelby asked whether the Fed could compel credit-card issuers to include a warning on statements about how long debt would linger if only the minimum payment were made, “Or is legislation necessary?” Bernanke replied that “we are doing a top to bottom review” of Regulation Z to determine whether such issues need a supervisory or legislative solution.

Sen. Paul Sarbanes (D-Md.), the committee’s ranking Democrat, questioned the Treasury Department’s leadership of the Financial Literacy and Education Campaign. FLEC — a group of 20 federal agencies including the SEC and the Federal Reserve, created to establish a national strategy for financial literacy — was due to deliver a report to Congress last July. Sarbanes and Shelby complained that the report, delivered only last month, lacks not only a cohesive national strategy but also a set of metrics and methodologies to measure progress.

At least one consumer watchdog group was more straightforward with suggestions of how corporations could help the education effort. Cindy Hounsell, executive director of the Women’s Institute for a Secure Retirement, recalled that during the 1980s, “everybody was talking about IRAs.” Hounsell maintained that a similarly ubiquitous campaign, relying on employers as well as regulators, is needed to promote financial literacy.

Companies of all sizes should make it easier for employees to contribute to defined-contribution plans, contends Jean Setzfand, a director of financial security for AARP. Setzfand (who spoke with CFO.com but did not attend the Senate hearing) says that a good first step is automating 401(k) enrollment and management, and enabling automatic payroll deductions to an index fund so “the inertia” that otherwise might thwart savings efforts actually works in the favor of employees.

Setzfand also believes that employers are in the “best position” to provide continuing finance education, especially retirement counseling, to their workers. She’d like to see such efforts included in employee benefits packages; Setzfand also points to a bill in Congress that seeks to relax regulations that sometimes prevent corporations from becoming too involved in 401(k) planning.

For those companies still disinclined to shoulder part of the financial-literacy load, Bernanke also maintained that investor education is a “win-win proposition” for employers and employees. The Fed chairman testified that a more financially literate workforce increases a company’s performance and productivity while decreasing absenteeism.