Financial Wellness Programs to Reduce Employee Stress

Financial Crisis: The Facts

A number of macro-trends are making this issue of financial health and wellness more important than ever before. To start, the rich are getting richer and the poor are getting poorer. In the wake of the Great Recession, a vast majority of the gains made in the economy were by the top 1%. A team of Berkeley researchers found that the top 1% incomes grew by 31.4%, while bottom 99% incomes grew only by 0.4% from 2009 to 2012. In 2013, the Census reported that 45.3 million people were living in poverty. Forty-three percent of Americans are concerned that their savings are not enough to cover unexpected costs or emergencies.

These gaps are getting increasingly larger and solidified, making it more difficult for people on lower end of the socioeconomic spectrum to move up. Debt and poverty create vicious cycles. Consumers owe $11.52 trillion to lenders and creditors. An astonishing one-in-three American adults with a credit history are delinquent on their debt. These numbers get worse every year. Once you are in debt, or making barely enough to scrape by, it becomes all the more difficult to work your way out. Poverty and debt become a trap, which causes people to make decisions that are not in their best interest (which we will explore further below) and further perpetuate the cycle.

These trends have sweeping generational implications. The Brookings Institute issued a report that looked at the relationship between income inequality and social mobility. The United States is experiencing a growing divide between educational outcomes and families based on family income. High-income families spend more on their children’s education than low-income families. That gap in spending has caused a gap in achievement. This is known as the “income achievement gap,” and it has grown by 40% over the past 30 years. College graduation rates have increased sharply for wealthy students, but stagnated for low-income students.

Financial capability, even for families who do not live below the poverty line, is also a major concern. FINRA’s 2012 “State-by-State Financial Capability Survey” revealed that fewer than half (41%) of Americans surveyed reported spending less than their income, over a quarter (26%) reported having unpaid medical bills, more than half (56%) do not have rainy-day savings to cover 3 months of unanticipated financial emergencies, and over a third (34%) reported paying only the minimum credit card payment during the past year.

Some of the most alarming statistics surround student loan debt. In 2012, student loan debt surpassed $1 trillion dollars in the United States, and we have added another $200 billion since then. Nearly one in five American households is paying off student loan debt, as are approximately two thirds (37 million) of American students. The average debt per student is around $27,000, surpassing car loans and credit cards as the largest source of personal debt in America. To top it off, student loan debt soared by more than 11% last year.

Over the past decade, the volume and frequency of student loans have increased significantly. The amount of student debt incurred by those under the age of 30 has more than doubled, and student loans are burdening people with high debt early in life. According to the study “How Student Debt Reduces Lifetime Wealth,” Demos calculated that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households. The burden is only getting heavier, and yet, college has never been more important.

A recent report from Pew found that college graduates ages 25 to 32 who are working full-time about $17,500 more annually than employed young adults holding only a high school diploma.

“On virtually every measure of economic well-being and career attainment—from personal earnings to job satisfaction to the share employed full time—young college graduates are outperforming their peers with less education,” the report said. “And when today’s young adults are compared with previous generations, the disparity in economic outcomes between college graduates and those with a high school diploma or less formal schooling has never been greater in the modern era.”

An overwhelming weight of facts demonstrates just how huge a concern money is for most Americans, and people of all ages. Seventeen-year-old kids are struggling with financial stress as they apply to college. Parents with middle or low incomes are finding it more difficult to cover all their expenses with the resources they have. Financial stress even plagues people in or nearing retirement. A report last year from the National Institute on Retirement Security found that retirement savings in the United States are “dangerously low.” More than 90% of working households do not meet conservative retirement savings targets for their age and income. America is now in the midst of a “retirement crisis,” which means millions of senior citizens must keep working to support themselves and avoid slipping into poverty.

These factors are contributing to the “perfect storm” of consumer financial distress that could last for generations.

Money Troubles = Employer Troubles

Money trouble is one of the biggest sources of stress out there. A CNN poll found that money was the number one source of stress for citizens across 16 countries. Of the eight top sources of stress in America, five are financial, according to the American Psychological Association. People dealing with debt are far more likely to report health problems, as well as exhibit irritability, anger, fatigue, and sleeplessness. Financial stress is also linked to higher rates of headaches, abdominal pain, ulcers, insomnia, muscle tension, and heart attacks. They are more likely to adopt unhealthy behaviors, such as smoking, alcohol and drug abuse, and gain weight.

Unsurprisingly, all these side effects have a negative impact on their work. When people are unhappy or bogged down by stress, they are less motivated, less efficient, less creative, and the quality of their work suffers. Fifteen percent of American workers experience financial stress to such a degree that it affects their productivity. A recent Health Affairs report found that employees reporting high stress were $413 more costly per year on average than workers who were not at risk from stress.

Researchers have identified a link between financial stress and days of work missed. Financially stressed workers also tend to spend more time at work handling personal finances. Across workers of all generations, 24% admit their personal finances have been a distraction at work. And, of those workers who are concerned about their finances, 39% spend at least 3 hours each week either thinking about or dealing with financial problems at work. This number is higher for Generation X workers—29% say their personal finances distract them at work, and 53% find it stressful to deal with their personal finances. This fact is particularly salient considering that Gen Xers are now entering their peak earning years.

The price of this stress and distraction is huge—Gallup pegged the cost of America’s “disengagement crisis” at $300 billion in lost productivity annually. Employers’ admirable efforts to encourage exercise and reward weight loss only go so far if an employee is worried about paying the bills.

The negative impact of financial stress goes beyond workplace productivity. Money troubles also have a marked impact on behavior and cognitive function. Harvard Professor Sendil Mullainathan and Princeton Professor Eldar Shafir published a book titled Scarcity in 2013, which examined how scarcity creates a similar psychology for people struggling to manage with less than they need. The book argues that scarcity depletes people’s self-control, inhibits their ability to learn, fuels anger and impatience, and causes impulsiveness and bad decision making that perpetuate the cycle. What people do in times of scarcity are not necessarily things that benefit them in the long term. This means that people who are just scraping by are more likely to make decisions, such as resorting to exorbitant interest payday lenders, which end up worsening their financial situation.

In one experiment on cognitive function, the authors found that the ability to work is more drastically compromised by financial stress than by sleep. A person who is financially stressed is less able to successfully perform work than someone who has been sleep deprived. The workplace implications of this are significant. Employers rely on employees to do things that involve reliability and safety, like operate heavy machinery. Or they are tasked with handling sensitive client issues, accurately inputting information, or keeping track of product inventory. Would you want someone who is less functional than a sleep-deprived person do this?

Financial stress is rampant, and bad for employees and employers alike. It is in everyone’s best interest to implement programs that help employees avoid poverty and debt, overcome financial stress, and develop positive habits that keep them financially healthy in the long term.

Financial Literacy: Red Herring?

One of the culprits of financial stress and unhealthiness is financial illiteracy. Overall, people in the United States are “woefully underinformed about basic financial concepts with serious implications for saving, retirement planning, mortgages, and other decisions.” The National Foundation for Credit Counseling revealed that 40% of adults gave themselves a grade of C, D, or F on their knowledge of personal finance. On a test of five basic financial literacy questions, the national average was 2.88 correct answers. Most Americans cannot even pass a basic quiz testing key financial principles—such as what happens when inflation outpaces the amount of interest you are earning in a savings account.

A 2009 FINRA study found that “low levels of financial literacy are associated with high levels of indebtedness, lower wealth accumulation, and less retirement savings.” It also found that financial capabilities were especially low among certain populations, namely, young people, low-income households, Latinos and African Americans, and that low financial literacy serves as a barrier to the middle class. The cost of financial illiteracy is high.

To combat these issues, the United States has thrown billions of dollars into promoting financial literacy. President Obama created an advisory council on Financial Capability in 2010 that was tasked with recommending ways “to empower Americans to better understand and address financial matters in order to improve their financial well-being.” The goal of the Council was to get people back on track after the economic crisis. The resulting resource guide in 2012 called on employers of all sizes to get more involved.

“American employers are a trusted source of financial education for their employees,” it said. “Effective financial education programs can improve employee finances.”

However, tackling financial illiteracy is not enough, or perhaps beside the point entirely. It is a distraction from what really matters. Despite all those years and billions of dollars, there is little evidence that financial education leads to improvements in decision making.

Financial journalist Helaine Olen wrote a powerful article in the Pacific Standard this year titled “The Quest to Improve America’s Financial Literacy Is Both a Failure and a Sham.” She wrote that Wall Street and politicians claimed that one of the major causes of the 2008 Great Recession was the public’s lack of financial literacy. This set off a wave of financial literacy initiatives (including one on Sesame Street), but Olen argues these initiatives have had little to no effect on financial health.

University of Colorado consumer psychologist John Lynch and marketing experts Daniel Fernandes and Richard Netemeyer compiled the results of more than 200 studies of financial literacy programs, adjusting for subjects’ family background and personality traits that had been ignored in the previous research. They found that financial education has a “negligible” impact on subsequent financial decisions and behavior. Within 20 months, almost everyone who has taken a financial literacy class has forgotten what they learned.

A study by researchers at the Brookings Institution could not find “strong evidence that financial literacy efforts have had positive and substantial impacts.” A study from Jump$tart discovered that a decade of financial literacy programs for high school and college students actually caused average literacy scores to drop by nearly 10 points, and a 2009 study found that young adults who took a finance class in high school were no more financially literate than those who did not take the course.

Most people know that they should not spend more than they earn. They know it is better to avoid going into debt, but often they do not have a choice. The leading cause of bankruptcy is not overspending, nor lack of adequate financial planning, “but the financial free fall caused by a health crisis.” NerdWallet Health has found that Americans pay three times more in third-party collections of medical debt each year than they pay for bank and credit card debt combined. Between 2010 and 2013, American households lost $2,300 in median income, but their health care expenses increased by $1,814. Out-of-pocket spending is expected to accelerate to a 5.5% annual growth rate by 2023—double the growth of real gross domestic product.

Financial education does not go very far when you are sitting under a mountain of medical bills, or making minimum wage with two kids to support. The weight of evidence shows that ordinary consumers would not make better decisions if they just had more education, and more education does not mean they make better decisions. This leads to the question—what can employers do to ensure the financial health of their employees?

Financial Wellness Programs

Employers, as the entity providing income, have a natural role to play in the financial lives of their employees. It is also in employers’ best interest to get involved. Most people today are worried about money, and this negatively affects their work effort and drives up costs. Additionally, employers are in a powerful position to guide their employees toward financial health. Financial education alone is not enough, but there is still plenty employers can and should do.

On the most basic level, paying employees a livable wage is key. This may seem obvious, but the number of corporations paying employees on subsistence-level wages indicates that it is not. McDonalds has been under fire this year for not paying its employees enough to get by, no matter how “responsible” they are with their money. Walmart, the largest private employer in the United States, pays its associates an average of $11.83 per hour. As a result, most of its employees rely on food stamps and other social programs, receiving an estimated $6.2 billion in subsidies annually. The best way to avoid financial stress is pay employees a reasonable amount to live on, even those at the bottom of the ladder. Once that is taken care of, financial wellness programs are the next step.

The goal of a financial wellness program is to enhance an employee’s overall financial well-being. A good program has multiple, integrated components. While financial literacy studies found that education programs have a negligible impact on subsequent financial decisions and behavior, they can be effective at the “point-of-sale,” meaning the time when someone has reached a point in their lives when they actually need a given financial service. For example, when someone starts a new job and is looking at pension plan options, then that is the right time to provide education or advice to make those decisions.

Giving employees access to professional financial advice is one way to help them make smart decisions. Most people do not avail themselves of professional financial advice, unless they are wealthy or nearing retirement. These services are expensive, with costs running to $1,000 to $3,000 for a financial plan. Often the people who are most in need of honest financial advice cannot afford it.

Employers can help. A MetLife study found that 58% of employees in the United States would like their employer to provide access to financial planners to help them make decisions about financial needs. Whether they want to learn how to make a budget, or explore the pros and cons of a mortgage, connecting employees with a professional can help them acquire information they need when they need it, and make smarter decisions. This does not have to happen on a case-by-case basis. Bringing in a professional to teach group classes or run a financial clinic can also be effective. The key thing is to make good help available.

Looking out for the financial health of employees also means offering good benefits packages for retirement saving, health and life insurance and more, so employees know they are taken care of. If they understand their options and feel that their employer has their back, that support network will help reduce stress. Sometimes all the various benefits and compensation packages can be confusing, so employers should take steps to ensure their employees understand the choices they are making. EMC, for example, offers a WealthLink program, which provides employees with an individualized site that helps them develop their own management plans based on their individual needs and goals as well as action-based tools to optimize the personal value of their compensation and benefits.

Good financial wellness programs leverage the power of peer groups to keep employees on track. Just like with physical fitness, peer pressure and accountability are powerful ways to keep people motivated and diligent about achieving their goals. It also makes it more fun, because there is a social component. Fun is important, because people are more motivated to stick with something they enjoy.

Staples is an interesting story. The company realized that its 401(k) plans had low participation rates and began looking for new ways to deliver “highly engaging financial wellness training at scale for a diverse, far-flung workforce.” That is quite a challenge. The solution? Gamification. Staples hired a game designer to build a game called “Bite Club” where players manage a nightclub for vampires and have to make financial decisions, like investing in a 401(k). Employees can also compete against each other and against employees in other stores, which builds camaraderie.

Saving is another important component of financial wellness. Americans, as a whole, are bad savers. We spend more as we earn more, pay extra for instant gratification, and use credit cards to splurge on things we cannot afford. The average American family has $3,800 in their savings account. Americans spend 94% of their disposable income and 43% of families spend more than they earn. One in four American families has no savings at all.

For people who live paycheck to paycheck, saving may seem impossible, but it can actually be spending less and saving that helps people move beyond scarcity. Research has shown that regular saving leads struggling American workers out of the bottom 20% and is a powerful indicator of upward mobility. The Corporation for Enterprise Development conducted a 5-year study on goal-based savings accounts and found that more than half of program graduates no longer needed assistance after completing the program. Furthermore, saving also has positive effects on self-esteem, provides hope for the future, a sense of security and fiscal prudence. A team of researchers at Kansas University School of Social Welfare found that when savings accounts are started for children of low-income families (and financial education is included), students are more likely to attend college and graduate, thus improving their financial prospects for decades. Saving creates a virtuous cycle. Employers can set up similar programs by allowing employees to automatically direct a certain percentage of their income into a goal-based savings account.

Employers can also promote financial wellness by helping their employees make necessary life purchases, with the flexibility to pay over time. People often go into credit card debt because they have unexpected expenses or needs, like a refrigerator breaking or a job opportunity that requires owning a computer. If they cannot afford that purchase at the moment, they either struggle at home without it, buy it and go into debt, or allocate money away from other expenditures, like food or new clothes for the kids to. None of these options is ideal.

WorkPaysMe has an inventory of over 4,000 items from major brands, including electronics, furniture, kitchen appliances, fitness equipment, jewelry, and even toys—especially relevant with the holidays are approaching. Employees get instant access to exclusive offers, and automatic payment plans spread out over 2, 4, 8, or 12 months with no interest. They can live the lifestyle they need and take care of their family, without worrying that important purchases will snow them under financially.

Low Cost–High Return

As you can see, many different components go into promoting financial wellness and developing an effective financial wellness plan. Considering the impact money stress has on physical and emotional health, these efforts are most effective when integrated into an overall wellness plan, which also includes things like group weight loss challenges and healthy eating campaigns.

Financial wellness programs may not be widespread yet, but they are on the rise. Human resources consulting firm Aon Hewitt polled more than 400 companies in 2014 and found 3 out of 4 are somewhat or very likely to expand employee benefits designed to promote financial well-being, and 25% are likely to assist employees in developing the skills needed to budget and manage their money.

The return on investment for these programs is difficult to quantify, but significant. A report from the Consumer Financial Protection Bureau found that financial wellness programs are as effective as health wellness in changing employee actions, and result in increased productivity and engagement, and savings associated with reduced sick leave. Those returns range from $1 to $3 or more per dollar invested. Those are big gains for programs that are relatively easy and low-cost to implement. When employers prioritize the financial well-being of their employees, everybody gains.