Financial Distress for Employees Means Lower Profits for Employers

The majority of workers are behind in retirement savings goals or have not yet started to save, and don’t have a plan in place to reach short or long-term goals. More than 50 percent of workers today are living paycheck to paycheck, and 69 percent of those are concerned with paying monthly bills. Many workers have little appreciation or understanding of their company’s retirement plan. Employers pay the price.

Consider These Statistics

Workers’ financial distress causes distractions that interrupt performance, attendance, and overall productivity. Research by Dr. E. Thomas Garman shows that 60 percent of workers are experiencing moderate to high levels of financial stress. He says that 30 to 80 percent of financially distressed workers spend time at work worrying and dealing with financial issues instead of working. On average, such workers waste approximately 13 to 25 percent of their work time dealing with personal financial matters.

According to numerous studies, workers’ financial problems can also contribute to higher employer health care costs. Workers cite financial problems as their most frequent cause of stress, and 75 to 90 percent of doctor visits are related to stress. Employees’ hypertension, insomnia, tension, anxiety, depression, headaches, abdominal and digestive problems, ulcers, fatigue, and substance abuse are all stress-related. Workers who are financially stressed are more likely to turn to drinking, smoking, overeating and other unhealthy coping behaviors. Alcohol and drug abuse alone may cost employers up to 10 percent of payroll costs.

The American Institute of Stress estimates that 60 to 80 percent of on-the-job accidents are stress related. Those accidents can lead to increased disability and workers compensation claims, and exposure to liability, in addition to increased absenteeism and lost productivity.

Financial illiteracy results in poor benefits utilization and lack of retirement readiness. A recent report by Hewitt Associates revealed that only one in eight employers believe their employees understand the retirement benefits their company has provided and that employees are adequately planning for their retirement. Fidelity Research Institute’s 2007 Retirement Index study shows that baby boomers are on track to replace only 62 percent of current income, including all investments and Social Security.

More common signs that indicate financial illiteracy is a problem for employees – and their employers – include bankruptcies in the workforce and wage garnishments, which cost employers time and money in processing, and potential liability if garnishments are not calculated, monitored and delivered correctly. Theft of workplace supplies, inflating expense reports, and poor use or under-utilization of benefits can also indicate financial stress.

Defining the Problem – for Employers and Employees

Employees’ inability to manage personal money matters is costing businesses, and must be managed. By helping employees, businesses reduce some of the negative “costs,” thereby increasing profits.

The problem that needs to be managed is twofold. Employees who are not adequately saving for retirement cannot retire in a timely manner. This brings up the second point: most employees were never taught money and investment management skills, and are often unable to save for retirement because of their current financial strain. They are not budgeting or planning for goals and expenses, and the result is they are falling deeper into debt and unable to save.

How should these issues be addressed? Employees must learn the basics of money management, and they must take ownership of their money and their future.

Employers cannot do it for them, but they can put them on the right path. And it pays to do so!

Retirement Planning: Auto-Features Are Not the Solution

In addition to Social Security, workers today are relying on defined-contribution (DC) plans as their primary source of retirement income. Among employers, the new definition of DC-plan success is to achieve “retirement-income adequacy” and maximize the number of people who can retire comfortably. Plan sponsors are questioning whether their plans will be able to provide sufficient retirement-income replacement for workers.

Many employers feel the solution is to put every decision on “autopilot.” Plan features include auto-enrollment, where all employees are enrolled in a retirement plan unless they opt out, and auto-increases, where contribution rates are automatically increased at certain points. Features also include auto-investing, where investment decisions are made for employees based on minimal criteria such as age, and auto-rebalancing, where investments are managed to maintain a certain risk level.

With auto-pilot features implemented as part of DC plans, some employers feel their liability concerns are diminished. But one of the largest sources of class-action lawsuits today is fiduciary liability, resulting from companies misinterpreting their fiduciary duties under the Employee Retirement Income Security Act (ERISA). With increasing compliance pressures, and a growing understanding of the negative impact financial illiteracy has on businesses, employers want to fix the problem.

Employees participating in auto-pilot plans have no ownership; they assume their retirement needs will be met, and that their employer is managing their plan for them. But workers must take an active role to ensure a successful retirement. Planning for one’s future is not a one-time activity, and typically involves taking steps to manage immediate needs before moving to long-term savings and planning.

Comprehensive Workplace Financial Education Is the Answer

In a recent survey, 80 percent of employers said they were “very likely” or “somewhat likely” to communicate to participants about retirement-income adequacy. The term “communicate” may be the key to explaining why most campaigns fail to help employees reach goals and bring value to employers. Some companies have tried campaigns involving more collateral materials and newsletters, even investment advice. Some of these campaigns have worked, successfully helping employees build their financial knowledge and portfolios, but many have failed. Employees must be “educated” and “empowered” to take control and take action!

The most common excuse of those who don’t participate in their company’s retirement plan is a lack of funds. Effective financial education teaches these employees how to find money within their existing budget to fund the plan at little to no after-tax additional cost. Education must teach employees that planning for retirement, and other goals, is their personal responsibility; no autopilot program will do it for them with complete accuracy. Additionally, education must focus on how to take control of personal finances. It must begin with the basics of money management: budgeting, debt management, goal funding, emergency funding; and then move into 401(k) management and creating sufficient and sustainable retirement income so workers can reach retirement goals and live, once retired, with adequate income to cover ongoing and often escalating costs such as health care.

A Return on Your Company’s Investment

In 2006, Dr. Garman and other researchers found that employers can expect $450 in positive job outcomes and $300 in lower health care costs for each employee who improves his or her financial behaviors and financial well-being. They estimated that mid- and large-size employers might realize additional savings of $2,000 for improving employee financial literacy. The EDSA Group showed one of their clients that the increased Flex Spending Account participation (due to educational programs presented) saved the company more in FICA taxes than the educational programs cost annually.

Educating a workforce is a long-term commitment and is not accomplished in one meeting – or even one year. An effective financial education program is an ongoing series of educational offerings that should begin at a new employee’s orientation and continue through to eventual retirement.

Financial education providers should provide an array of programs geared to employees at different stages of life. They should provide education through different media. Live, face-to-face workshops have proven to be very effective tools, as have one-on-one employee meetings. Online software tools and self-study programs may also be vital to meet the needs of the population. Traditional print materials and plan provider materials may also be incorporated into the strategy.

Retirement Readiness Benefits Employees and Employers

Content employees who have the ability to retire at the appropriate time are valuable to their employers. Retirement readiness refers to employees’ ability to financially afford to retire. At a certain point, most employees are emotionally ready to retire, but often can’t afford it yet. By instilling good money management habits and wise investing throughout employees’ careers, employers can reasonably expect their employees to reach retirement readiness – and afford it – much earlier than they would without ongoing training.

A study conducted by a Southeast Louisiana Chemical company revealed the impact of financial education on its employee population. After receiving workplace financial education, 45 percent of employees increased their contribution amount to their 401(k); 34 percent started contributing to their 401(k); and 70 percent changed their investment strategy to become more diversified. In comparison to the employees who did not attend workplace financial education, participants who did participate reported experiencing greater than average financial wellness and better health.

Those who did not participate in the education were more likely to experience financially stressful events; were more likely to reach the maximum limit on a credit card; were more likely to worry about the amount of money they owed; and were more likely to worry about being able to pay monthly living expenses.

Workplace financial education gives employers documentable evidence of efforts to manage risk. Research has found that financially literate employees often receive better reviews, because personal financial knowledge is transferable to the business world, resulting in more promotable employees. If a company chooses to offer early retirement, employees who are financially secure will be more likely to accept the proposal.

Research findings have demonstrated the benefits of financial education. These include increased worker loyalty; reduce exposure to liability; improved retirement plan participation; increased retirement plan contribution rates; reduced employee turnover; improved employee attendance; increased readiness to retire on time; and more confidence in making financial decisions. Employers’ commitment to financial education can help their employees – and their companies. http://www.bclip.com/movieplayers/edsa/

BIO: Susan S. Windham – The EDSA Group

Susan Windham is CEO of The EDSA Group (http://www.theedsagroup.com), a national leader in workplace financial education. The EDSA Group offers live workshops, one-on-one educational meetings, and an online financial education program, Goodmoneyhabits.com, for employers who want to help employees make informed decisions about their personal finances. Windham may be reached at (001) 800 942 2777.