28 hours per month. That’s how much time the average American worker spends researching and dealing with personal financial issues, and the resultant stress could be devastating to employee health and workplace productivity. Indeed, study after study has confirmed that financial stress is one of the greatest sources of lost productivity in the workplace, costing employers an estimated $5,000 per worker annually.
Uncertainty or discomfort with respect to financial matters is almost always listed among the top three sources of personal stress, for men in particular. And since higher levels of stress are highly correlated with negative health outcomes (as many as 90% of doctor’s office visits are estimated to stem from stress-related issues), it could easily be deduced that easing financial stress could have a dramatically positive effect on the overall health of our nation’s workers.
Employers are in a unique position to help assuage workers’ fears, and they also stand to benefit directly from their own efforts. Particularly given the overall trend toward implementing employee wellness programs in the workplace, we believe that financial education should be a central part of any well-designed employee benefits package.
The Changing Face of Employee Benefit Packages
In today’s workplace, employee benefits have become an increasingly important portion of workers’ total compensation packages, with benefits representing an estimated 30% of total compensation for private-sector employees. While health care costs have traditionally been the largest component of benefits spending, rapid changes in the health care landscape have forced many employers to reconsider the composition of their benefits packages.
According to research from the Employee Benefit Research Institute (EBRI), while health care coverage rates in the workplace have remained remarkably consistent over time (between 73% and 78% of all active workers), the nature and type of insurance has shifted dramatically. Gone are the “Cadillac” plans that were common in past decades, replaced by plans with higher deductibles, more frequent copayments, and various limitations on covered services. Yes, the Affordable Care Act has helped to rein in some of these limitations, but the declining quality of employer-based insurance has nevertheless continued. As the Kaiser Family Foundation reports, average deductibles for employer-provided health insurance have increased by 47% in the last five years, with 41% of covered workers now facing deductibles in excess of $1,000.
While most employers feel that they are making these decisions simply out of necessity in the face of spiraling insurance premiums, the deterioration in the benefit nevertheless inevitably leads to some level of employee dissatisfaction. Employers have responded by attempting to make up the difference elsewhere, introducing a wide variety of non-traditional employee benefits in an attempt to improve worker morale and decrease turnover. But while these benefits may be well-intentioned (and even well-received), they are nowhere near as impactful to a business or an employee as a properly designed financial wellness program.
Financial wellness programs are particularly useful when implemented in combination with a comprehensive 401(k) plan, but their benefits can be great even for (and possibly even especially for) those employers who do not offer retirement plans. Since workers without retirement plans are officially “on their own” when it comes to retirement planning, access to employer-based financial education services can be a vital piece to their financial planning process, helping them to understand how to design and implement a viable long-term plan.
The Urgent Need for Employee Education
The dire state of personal finance in America has, by now, been well documented by numerous private companies and public agencies. A Bank of America/Merrill Lynch report found that 65% of surveyed employees were “not financially well”, scoring 4 or below on a 10-point financial wellness scale, while 90% reported experiencing at least some stress about their financial situation. Another recent report found that 53% of workers were under “serious financial distress”, with 82% of those having no emergency savings at all. That last statistic confirms the findings of a 2011 report that found that two-thirds of Americans would be unable to cope with an unexpected $1,000 expense.
But even those employees who don’t report serious financial stress are still in need of help. An estimated 39% of workers are not confident in their investment allocation decisions, while 41% don’t understand the tax implications of their investment and retirement accounts. And as mentioned above, these financial difficulties can have wide-reaching effects. According to the Consumer Financial Protection Bureau (CFPB), those who report high financial stress also report suffering from headaches, severe depression, anxiety, and digestive tract problems. More than half of those in the “high financial stress” category experience muscle tension and lower back pain, as compared with 31% of those in the “low financial stress” group.
As might be expected, these health issues can lead to higher health care costs for employers. The CFPB cited a Health Affairs report that found that those reporting high stress were $413 more costly per year on average than other workers. For the sake of comparison, smoking—which is widely known to be a significant health risk—increased health care costs by an average of $587.
In extreme cases, financial stress can even increase employer costs related to theft and embezzlement, which drives right at the employer’s bottom line. In short, if an employer wants to encourage healthy outcomes for its employees (and its own bottom line), it can start by helping to ease their financial stress. In all likelihood, the best way to start is by addressing the national shortfall in financial literacy.
In 2012, FINRA conducted a National Financial Capability Study, aiming to gauge the financial literacy of the nation’s workers. After asking basic demographic questions, FINRA administered a simple five-question quiz, testing knowledge of basic financial concepts—unfortunately, only 14% of Americans were able to “ace” the quiz, with 38% of respondents answering two or fewer questions correct (if you’re curious, you can go ahead and take the quiz here).
For an employer-based financial education program to make a difference, it doesn’t need to re-invent the wheel—it just needs to address basic financial concerns in an accessible way, to help employees in an area where they may not even realize that they need help.
Employers Benefit from an Employee Benefit
Historically, workplace wellness programs have focused purely on employees’ physical well-being, but this focus is short-sighted. By recognizing that a significant percentage of health-related problems have roots in mental stresses, employers can make a meaningful impact in their workers’ well-being without having to tackle any major lifestyle issues (like the familiar “eat less, exercise more” advice).
If executed properly, a comprehensive financial education program could decrease overall health care costs, potentially driving down the overall cost of the employee benefit package. This is, of course, the goal of all corporate wellness programs, but many of those focus on lifestyle aspects that employers are, realistically, powerless to change. Perhaps unsurprisingly, the return on general wellness programs is somewhat questionable, but preliminary statistics on financial wellness programs are much more encouraging.
What may be most appealing to an HR director is that increased financial wellness is associated with increased satisfaction with employer benefit packages. According to the Bank of America study cited above, 61% of “financially well” employees report being “very satisfied” with their workplace benefits package, as compared to only 27% of “not financially well” workers. Financial education programs, then, can be considered an incredibly important aspect of an overall benefits package.
The Social Security Administration confirms that those who receive workplace education tend to have higher savings rates, higher rates of 401(k) plan participation (by 12 percentage points), higher average contributions, and higher overall plan balances.
By their very nature, employers already play an outsized role in determining and helping to meet an employee’s retirement goals. Having already made the statement that “I want to be the centerpiece of your long-term financial plan” (especially if the employer is providing a 401-k), it’s important to give employees all of the tools necessary to succeed, not just a periodic paycheck.
Furthermore, for those employers who do offer retirement plans, financial wellness can also be a key piece of meeting fiduciary responsibility. As the Kansas City Federal Reserve points out, having financially distressed employees can conceivably have a negative impact on certain non-discrimination tests. Essentially, these tests require a balance between 401(k) contributions for highly-compensated employees and lower-compensated employees. If the members of the rank-and-file are uninformed or otherwise unable to contribute to their retirement plan, their lack of contributions could imperil the firm’s ability to provide a high-quality retirement plan (and, therefore, to attract high-caliber employees in the future).
In the words of the Kansas City Fed, “a lack of saving on the part of low compensation employees can tie the hands of an employer who wants to attract talent through more generous retirement benefits.” Given that dynamic, it can be seen that offering financial education can actually enhance an employer’s ability to offer a competitive overall benefits package.
The Bottom Line
Even in the best of circumstances, it’s unrealistic to expect that an employer can completely remove stress from an employee’s financial situation—there are certain macroeconomic factors in play that no benefits package or educational program can ever hope to solve. But in the current environment, in which 1 of 5 employees admit having skipped work in order to deal with financial matters, there is obviously significant room for improvement.
Keeping current employees happy is no small matter—according to some estimates, the full cost of replacing an employee who leaves is typically between 1.5 and 2.5 times that worker’s original salary. So with all that said, how do you know if your employees are feeling financial stress? The easy answer, of course, is to ask them. But beyond that, check trends in days off taken by workers. Are they higher around certain times of the year, like holidays or tax season?
If you offer a 401(k) or other retirement plan, check your participation rates—if a higher-than-average percentage of employees are electing not to participate (the national participation average is around 80%), that may be an indication of unusual financial stress. Plan hardship loans could be a similar indicator—if more than 15% or 20% of employees have taken out loans against their 401(k) balances, that’s a bad sign, since half of workers under “serious financial stress” have tapped their retirement plans for loans.
Health care benefits aren’t the only way to ensure that your employees remain happy, healthy, and productive for years to come. By taking basic measures to enhance the health of an employee’s bank account, both employer and employee can end up in a better spot for the long term.