Practical Applications of Financial Literacy, the “High-Fee Puzzle,” and Knowledge about the Importance of Fees

Abstract

In <b><i>Financial Literacy, the “High-Fee Puzzle,” and Knowledge about the Importance of Fees</i></b>, from the Winter 2021 issue of <b>The Journal of Retirement</b>, authors <b>Leslie Muller</b> (<b>Grand Valley State University</b>) and <b>John A. Turner</b> (<b>Pension Policy Center</b>) explore the nature of the “high-fee puzzle,” whereby consumers pay higher fees for financial services when lower-fee alternatives are available. The authors show that even populations with higher-than-average financial literacy—like the group of predominantly business students surveyed here—answer fee questions correctly only one-third of the time. This relatively low rate indicates a need for better education in all populations, and given the respondents’ high average scores on common financial literacy questions, indicates a potential gap in the knowledge assessed by these questions. Furthermore, the inclusion of such questions on financial literacy assessments is promising as a means of highlighting the importance of fees to respondents, cuing them to evaluate the impact of fees in making financial decisions.