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

Abstract

In Financial Literacy, the “High-Fee Puzzle,” and Knowledge about the Importance of Fees, from the Winter 2021 issue of The Journal of Retirement, authors Leslie Muller (Grand Valley State University) and John A. Turner (Pension Policy Center) 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.