How Employers Profit
Video Transcript: Hello. I'm Dr. E Thomas Garman, Professor Emeritus and Fellow, Virginia Tech University.

My comments today reflect over 20 years of research on financial literacy. The question posed is "Why should employers care about employee financial literacy?"

First of all, most employees would agree they would be better financially if they had more income. While it is nice to have a bigger income that alone is not the solution for better financial well-being. What does increase one's level of living is improving financial literacy and putting into practice the newly learned good financial behaviors.

Employers have a large stake in employee financial literacy. Why? Because increasing employee financial literacy improves employer profits. It is that simple.

During my career at Virginia Tech I directed the University's National Institute for Personal Finance Employee Education. There a collection of scholars conducted breakthrough research on the negative costs to employers for the poor financial well-being of employees. One study found that the Department of Defense loses $1 billion annually in direct costs and reduced productivity due to employee stress about money matters. Examples of direct costs are absenteeism, short-term disability, turnover, wage garnishments, and accidents.

A national award-winning research study by Dr. So-hyun Joo concluded that employers increase profits by $450 annually for each employee who slightly improves his or her financial behaviors. The return comes from reduced absenteeism and less work time used dealing with personal financial matters.

Now here are some newer numbers. Employees who are stressed about their personal finances, who are not making good money and credit management decisions and who have not wisely selected among employer provided benefits cost their employers between $450 and $2,100 annually. This is wasted employer money. And $550 of the larger amount is cash money on the table-employer dollars that need not be given in FICA taxes to the federal government.

Financially literate employees practice good financial behaviors. They save and invest within their employer's 401(k) plan at a level sufficient to anticipate a comfortable retirement. Where appropriate for their situations they sign up for health care and dependent care reimbursement plans. And when given a choice in health care plans they select one that best suits their situation that often is not the most expensive. Importantly, financially literate employees typically enjoy better health.

So, how many employees are we talking about? A national group of academic researchers and business experts recently measured the extent of financial distress in the workplace. The conclusion: "Thirty million workers in America-one in four-are seriously financially distressed and dissatisfied with their personal financial situations."

These employees are unhappy with their finances and they worry about money, debt and bills. They worry about having enough money to live on once they retire. They often lack confidence about their abilities to manage personal finances. Many do not even have hope that they might one day be able to catch up financially. People at all income levels experience distress about financial matters.

And it may not be just 25% of your employees who are stressed about money. Other research shows that depending upon where they work, 30% to 80% of financially distressed workers spend time at work worrying about personal finances and dealing with financial issues instead of performing on the job.

It is also extremely important for employers to realize that a number of studies show that a large proportion of those who are financially distressed, 40% to 50%, report that their health is directly impacted-negatively-by their financial worries and problems. Health problems caused by financial distress cost employers big money. See my website for a concise valid and reliable measure of financial distress and financial well-being.

So, we can conclude that employee financial illiteracy does impact employers. In short, financially illiterate employees do not make the best decisions for themselves or their employers.

These findings should motivate employers to offer employees access to resources, education, counseling, and advice to decrease their stress about money matters and improve their financial lives. By the way, my calculations illustrate that for every dollar employers spend on financial education they gain a return of $3 or more. Recognize too that financial literacy is not just about knowledge even though comprehension is key. The most important part of financial literacy is to apply the knowledge by practicing good financial behaviors. People cannot build assets without good financial literacy. Moreover, it is vital to empower employees to be financially literate.

I will close with two observations. One, since financially literate employees improve profits find out what you can do to increase the financial literacy of your employees. Two, what could be more important to your employees, morally and socially, than to have them be better off financially when they leave you than when they started with you?