Financial Illiteracy Meets Conflicted Advice:
The Case of Thrift Savings Plan Rollovers

Abstract

In order to assess the quality of financial advice that Americans receive, the authors examine advice in a situation where bad advice is least likely to occur: advice given to pension participants concerning rollovers from a very low-fee pension plan. Bad advice in that circumstance would indicate that some pension participants are receiving really low-quality advice and that existing regulations are not protecting them. Bad financial decision making can be due to a combination of a lack of financial literacy and conflicted advice from advisers who know that many people are insensitive to differences in fees. This article sheds light on both the demand and supply sides of the market for financial advice by examining rollovers from the Thrift Savings Plan for federal government workers, which charges extremely low fees—less than 3 basis points for all of its investment options. The authors present evidence from three small surveys they conducted relating to advice for broker-dealers, advice from Registered Investment Advisers, and participant knowledge about fees as an explanation for why participants take bad advice. By analyzing issues related to TSP rollovers, this article sheds light on the broader topic of rollovers to IRAs and the still-broader topics of the quality of financial advice that people receive and how that is affected by the fiduciary standard.