Lost in the recent debate over Social Security reform is the fact that no matter what happens to the program, workers will still need to save for life after work. Unfortunately, far too many employees lack the proper financial savvy to manage their money and plan for retirement. Businesses can and should address this issue. If we are truly serious about providing for tomorrow’s retirees we need to educate workers on how to manage their money today.
Since the 1980s, when the first 401(k) plans were offered, there has been a trend away from employer-driven pension plans and towards employee-controlled defined contribution plans. Originally these plans were meant to supplement not replace pensions. Over the years, however, they have grown in popularity, because they gave workers greater flexibility in investing while lowering employer expenses.
Today most Americans rely on defined contribution plans for retirement. This shift in control from employer to employee, however, has not lead to greater financial sophistication in the workforce. There remains a considerable body of evidence suggesting that far too many employees lack the necessary financial acumen to manage their day-to-day money issues, let alone save for the future.
For example, benefits managers have long struggled to encourage participation in their companies’ 401 (k) plans with low-income employees particularly reluctant to invest. In fact, there is a growing concern among HR professionals that the private investment accounts proposed by the Bush administration could cause low-income workers to invest too conservatively in their 401(k) plans or to pull out of them altogether.
Benefits professionals have good reason to fear such a development. According to a recent Hewitt study of employees who have saved little in their 401(k) accounts, the majority lack even the most basic knowledge about their employers’ plans. For example, close to three-quarters (73 percent) were unable to correctly identify the rate at which their employer matched their 401(k) contributions. Another 54 percent were unaware that their company even offered matching contributions. More importantly, these employees were less likely to exhibit comfort with investing. Fifty-nine percent reported little to no knowledge of how to manage their investments, and almost half (48 percent) said they were unfamiliar with the investment options offered in their 401(k) plan.
Not surprisingly, many workers also have little understanding of how much money they will need to retire comfortably. According to the Employee Benefits Research Institute’s “2004 Retirement Confidence Survey,” 47 percent of workers who have not saved for retirement reported being at least somewhat confident about having enough money in retirement, with expectations that the funds will inevitably come from somewhere. What’s more, the survey discovered that while 58 percent have saved, the amount they have put away is minimal.
Employees’ money management issues extend beyond preparing for retirement. Many workers are struggling to stay above water, let alone putting aside money for the future. Bankruptcies have risen steadily since 1985, hitting 1.6 million in 2004. According to a recent Work/life TODAY article, a survey of employees at Children’s Health System in Birmingham, Ala. found that employees were not participating in the firm’s retirement plan because they simply could not afford to due to more pressing financial concerns.
This is a problem with both business and social implications. According to a recent Associated Press poll, half of all Americans worry about their debt and 20 percent report worrying about it all the time. Thomas Garman, professor emeritus at Virginia Tech University, estimates that at least 15 percent of workers are stressed to the point where it affects their work, with some spending as much as 20 hours per week dealing with personal money matters. Such distractions can be a significant drain on productivity.
A number of firms have already begun to successfully address money management issues by providing their employees with financial training. According to the Society for Human Resource Management, 29 percent of companies already offer general financial education to their employees. The aforementioned Children’s Health System introduced a financial education program to help address low participation in their retirement plan. Their benefits package included money management seminars, individual consultations, a telephone helpline and a Web site with financial planning information. Within one year the firm saw 500 employees take advantage of these offerings and participation in the retirement plan grew by 10 percent. In total, the program cost the organization $25,000, an amount they have more than recouped from increased productivity as their people are spending less time stressing over and dealing with debt issues.
In fact, Garman, in an article titled “The Business Case for Financial Education,” details the myriad ways financial education can positively impact the bottom line. These include:
- Increased worker productivity.
- Reduced absenteeism to take care of personal financial matters.
- Reduced human resource administrative costs to process wage garnishments and requests for payroll advances and 401(k) loans.
- Increased participation in and contributions to employer-sponsored retirement plans.
- Reduced Social Security payroll taxes because more workers utilize pre-tax health and dependent care.
- Reduced stress over financial matters and decreased stress-related illnesses from alcohol and other substances.
- Reduced health care premiums.
- Reduced human resource administrative costs because fewer questions are asked.
- Reduced turnover by attracting and retaining qualified workers.
- Reduced pressure to increase salaries and wages.
- Increased morale, work satisfaction and loyalty to employer.
Garman estimates that the total return on investment for financial education is anywhere from 300 to 900 percent.
In recent years, more and more companies have come to accept that attending to the well-being of their employees makes good financial sense. A physically and emotionally healthy employee is a productive employee. The same can be said about an employee’s financial health. The fiscally solvent employee is a happier, better focused and more effective employee. When we prepare the workforce for retirement, we are not only bettering society but our businesses as well.