Workplace financial education program: Does it have an impact on employees' personal finances?

Value to Employers
Education to Promote Employee Financial Well-Being: What Role for Employers? GTZ Case Study Book on Financial Wellness (2009), Prawitz & Garman

According to the Federal Reserve Board in the United States, American consumers continue to spend more than they earn. Easy access to credit has made this practice common in American society. As a result, millions struggle financially, and many of those near retirement lack the funds needed for a comfortable life. These observations were true before the October 2008 meltdown of global credit and stock markets and ensuing recession. Now economic times are tougher-- workers today increasingly face inflationary food prices, higher energy costs, rising health care expenses, faltering home values, and decimated retirement savings balances.

Employers are feeling the effects of their employees’ poor spending decisions and financial behaviors, for the outcomes are manifested as financial distress. Financial distress has been described as negative feelings about and reactions to one’s own financial situation. Such distress over financial matters is contributing to irritability, anger, fatigue, and sleeplessness for over 52% of Americans. To ease the pain, 48% say they overeat or indulge themselves by consuming unhealthy foods. Researchers have found that financial distress spills over into the workplace, contributing to such work-related occurrences as personal finance-work conflict, lower organizational commitment, less pay satisfaction, work time wasted dealing with personal finances, 4, more absenteeism, 4,5,7, and poorer health. 5

A number of studies have examined relationships between financial distress and workplace outcomes. Financial distress was found to contribute to increased personal finance-work conflict, a situation described as personal financial issues interfering with one’s job.4 Examples of personal finance-work conflict include getting to work on time and getting daily work tasks done. Clearly, such occurrences can decrease job productivity, a condition of special interest to employers.

Financial distress also has been studied in the context of its contribution to organizational commitment. Organizational commitment has been defined as psychological responses manifested through employees’ feelings and attitudes about the company that employs them. Organizational commitment includes such indicators as pride in the organization, judgements about whether the organization is a good place to work, and reflections about the organization’s ability to inspire best job performance. Kim and Garman found that employees with more financial distress displayed less commitment to their organization,5 a situation that does not bode well for the employer.

Pay satisfaction is another variable that has been studied in conjunction with financial distress. Level of pay satisfaction comprises such indicators as feelings about whether one is being paid a fair amount for the work being done, judgements about the adequacy of pay raises, and feelings about whether the amount of pay reflects appreciation by the organization. Researchers have found that those who reported greater financial distress also reported less pay satisfaction, regardless of the amount of household income. 6 Lack of pay satisfaction is a concern for employers as well as employees, as it could lead to increased turnover. Employee turnover represents additional costs to employers in the form of recruitment, interviewing, training, and other expenses.

A number of studies have examined the relationship between financial distress and amount of work time wasted dealing with personal financial issues. Work time wasted is sometimes called “presenteeism,” referring to the use of work time for activities unrelated to work. In the context of personal financial issues, work time wasted denotes such workplace activities as communicating with creditors about one’s past due bills, talking with co-workers about personal financial problems, and spending time worrying about personal finances while at work.4 Researchers have found that those employees experiencing more financial distress are more likely to spend an increased amount of time on the job dealing with personal financial matters. (4,7) Employees who spend work time worrying about and tending to personal financial matters certainly are less productive than they would be if all of their work time were dedicated appropriately to work-related tasks.

Study after study has supported the relationship between financial distress and absenteeism from work. Bagwell and Kim found that employees with more financial distress were absent from the workplace more often.8 Kim and Garman found that financial distress had a direct effect on absenteeism, with those experiencing more financial distress also reporting they were absent from work more often.5 Other researchers found that those experiencing personal financial problems used more sick leave. Jacobson and colleagues determined that financial distress represented one of the strongest predictors of illness-related absence from the workplace. Obviously, employees who are absent from the workplace are not able to contribute productively to the organization during the time they are not present.

Financial distress also is related to health outcomes. Those reporting more financial distress also report poorer health.(5,9,10) Employees who experience poorer health likely are not able to give 100% to their jobs, resulting in less productivity. Additionally, employees in poorer health are more apt to be absent from the workplace more often.14

Employers need to recognize that in every workplace part of the workforce is financially distressed. According to the national norms established for levels of financial distress/financial well-being in the general population of the United States, the percentage of financially distressed citizens is 30%, or nearly one third of the population. While financial distress will vary for employees in different workplaces across the country based partially on income, education, and other variables, employers can be sure that some percentage of their workforce is experiencing financial distress at any given time.

What is the responsibility of the employer to “fix” this problem? Should employers be expected to give raises to their employees to ease their financial strain? For workers who may not be managing their money wisely, would such a step provide long-term relief, or would workers making more money continue to spend more and save less? Researchers and financial educators propose a different approach-- instead of (or in addition to) a raise, employees would benefit most from employer-sponsored financial education.

While some employers offer comprehensive on-site financial education to their employees, most do not. Few studies have examined whether workplace financial education motivates employees to change negative financial behaviors. Kim reported in 2004 that the impacts of a workplace financial education programme on employees were increased financial well-being and improved financial behaviors. Other researchers had similar findings, including increases in both personal savings and savings for retirement following financial education workshops.

Empirical research on the effects of workplace financial education has been sparse, but researchers have studied outcomes following financial education in other venues, such as that offered through credit counseling agencies which provide debt management programmes. Such financial education has produced positive outcomes, including a decrease in financial stressor events (incidents that reflect financial hardship, like wage garnishments, repossession of goods, and home foreclosures). Additionally, credit counseling has an indirect effect on financial well-being and health. That is, credit counseling helps reduce the incidence of financial stressor events, which in turn leads to increased financial well-being and better health. 9, Such changes affect employers as well as employees; processing of wage garnishments, for example, costs employers money. Better health can mean fewer health insurance claims filed by employees, and subsequent reduced health insurance premiums for employers who provide health insurance. Since financial education changes financial behaviors of employees, reducing financial distress and the accompanying negative workplace behaviors, wouldn’t it pay employers to offer on-site financial education? The next sections will explore this question.

In order to understand the current workplace financial education practices of American employers, one must know a bit of the history of employer-sponsored retirement plans in the United States. To that end, this section will provide a brief background on the topic.

Today’s employer-sponsored retirement plans in the United States include both defined-benefit plans and defined-contribution plans. For many years, however, defined-benefit plans were the only type of retirement plan provided by employers, and a high proportion of employees were covered. Such plans promised retiring employees monthly checks for life, and the risk of investing rested with the employer. Defined-benefit plans today are provided by approximately 20% of employers, a percentage that has declined from 80% in the past 25 years.

Defined-contribution retirement plans constitute the most popular type of retirement plan offered by employers today. Defined-contribution plans provide employees a lump sum at retirement. Contributions to defined-contribution plans may be made by the employee, employer or both. Employee participation in defined-contribution plans is voluntary rather than all-inclusive, and as a result, only two of every three eligible employees participate in and contribute to a plan. Non-participants will have no lump sum of money at retirement to manage and draw upon for living expenses during retirement. Moreover, the shift from a defined-benefit retirement plan to a defined-contribution plan shifts the responsibility for enrollment in and management of retirement plans from employers to employees.

The Employee Retirement Income Security Act (ERISA) and regulations of the U.S. Department of Labor were enacted to protect the interests of retirement plan participants. These government regulations require the disclosure to participants of financial and other information concerning employer-provided retirement plans, and mandatory workplace financial information and education programs were born. While provision of defined-contribution retirement plans is optional for employers, provision of retirement information and education by those who do offer such plans is mandatory.

More than half of the large and mid-size U.S. employers offer workplace retirement-planning-focused financial education to employees. Nevertheless, such employers are finding it challenging to motivate employees to participate in the voluntary retirement programme or to take advantage of the educational programmes. Fewer than half of American workers contribute to any type of defined-contribution retirement programme, including both individual and employer sponsored plans . In addition, many employees who do participate do not contribute enough to create a sum sufficient to fund a financially successful retirement. Thus, while the burden of saving and investing for retirement has largely shifted from employers to employees many employees are not saving at all or not saving enough for retirement.

Employees could benefit from a variety of financial education offerings, including budgeting, managing credit, and saving, but most employers who provide financial education offer only retirement planning programmes. Most retirement plan sponsors, employers, seem to operate on the false assumption that employees earn more than they spend and thus are both able and willing to save for retirement during their working years. Yet millions of Americans report that they are unable to save for retirement. They say they cannot afford it. A frequent reason offered is too much credit card debt. “More and more families are running harder and harder to stay in the same place or to reduce the amount that they are falling behind.”

A meta analysis of 11 major national research studies, including MetLife, Principal Financial, American Express, Cigna, AARP, Caravan, Roper, and Gallup, as well as ten published academic research studies, reveal that 30 million American workers–1 in 4 – report they are seriously financially distressed and dissatisfied with their personal finances. This has negative consequences for the workers, their families and co-workers, and their employers. It also constitutes a serious social problem. Consumers, government, and employers need to recognize the sizeable nature of the financial distress problem and well as its ramifications, and take appropriate actions.

Clearly, employees do not know how to help themselves prepare for retirement. But the major failure of financial education programmes associated with defined-contribution retirement plans is the lack of focus on basic financial literacy, including knowledge about spending plans, credit management and savings. Lack of basic financial literacy is the major reason employees do not save for retirement. If employees are overly indebted and are spending more than they earn, they will find it difficult to save for retirement. Good decision making on basic personal financial issues means people can control their financial destiny despite the challengers of economic turmoil. Employees who take charge of their basic personal finances not only are living well today, but also are positioned to save and invest for a financially successful retirement for tomorrow.

It has never been more important to employers than now to recognize that employees with financial problems negatively affect profits. With gas prices rising, health costs soaring and consumer confidence seriously challenged, many employees are struggling with financial woes that threaten job productivity. Financially unwell employees do not make the best decisions for themselves…or their employers. Such employees often are passive, distracted, confused, and anxious. These are not characteristics of productive employees. Employees with money problems are like sharks swimming around the workplace taking bites out of the bottom line.

More profits, while representing an important benefit for employers, should not constitute the sole reason for offering employees financial education. Perhaps the most important reason is that it is the right thing for employers, as stewards of employee well-being, to do. Employers who offer easy access to quality financial education programmes are communicating a critically important message to employees: We know some employees are struggling financially, we care about you, we want you to live a better life financially both today and tomorrow, thus we will help you champion your financial interests. Employers who back up such claims with action and high quality financial education programmes will reduce turnover, increase organizational commitment, and increase profits. Investing—not spending--$150 to $250 per employee per year in financial education programmes will reap substantial rewards for employers as well as employees. Those rewards will come from an investment of a mere ¼ or ½ of 1 percent of an employee’s income.

The Personal Finance Employee Education Foundation argues that the return on investment for employers who offer employees easy access to quality financial programmes is 3:1 or more; thus, for an employer who invests $250 in a financial education programme, the expected return is $750. The foundation suggests that financially healthy employees can save employers up to $2,000 a year through increased productivity, reduced health care costs, better choices among employee benefits, and in a variety of other ways.

Employers need to bring together the basic financial resources that truly can help employees because collectively they reduce financial distress and increase financial well-being. Employees will experience such changes in financial wellness as a result of making better financial decisions. The components of a high quality financial programme typically include comprehensive offerings through individual coaching and counseling as well as department-wide seminars open to live audiences of employees and spouses. In addition to retirement planning and investment education, topics should include education about spending plans (budgeting), credit use and misuse, savings (especially an emergency savings account), wealth management, tax preparation, mortgages and lending decisions to facilitate homeownership goals, insurance, estate planning, and post-retirement planning. A variety of credit union and bank affiliations providing preferred services to employees also is typical of high quality programmes.

Employers can expect improved employee outcomes from high quality financial education programmes. For example, employees will begin to report lower financial distress and increased financial well-being. Employers will note less work time being wasted as employees spend less work time tending to personal financial matters. Job performance and productivity will increase, as will organizational commitment and pay satisfaction. Employees will enjoy better health, resulting in less absenteeism. So, take heed, employers: Don’t just give employees a raise-- offer help with money management challenges through high quality financial education programmes.

The Personal Finance Employee Education Foundation offers employers free use of its research-based Personal Financial Wellness (PFW) scale2 and encourages its use to measure employee financial distress/financial well-being. The PFW Scale™ is a peer-reviewed, published, valid and reliable measure (over 25 years in development) with national norms; 16 the 8-item online questionnaire takes only 3-4 minutes to complete. Employees can use the instrument to benchmark the financial health of their employees. They can insist that financial education providers design and deliver programmes to help employees reduce financial distress and improve financial well-being. One year later, employees can be surveyed again to evaluate programme effectiveness in reducing financial distress.

Use of the PFW Scale™ is free with permission (see the online permission form at www.PersonalFinanceFoundation.org). The instrument has been adapted for use in several countries, including Australia, The Gambia, Malaysia, India, and Mexico. There are over 80 approved users, including financial programme providers, financial planners, employers, researchers, government agencies, universities, schools, consultants, extension professionals, insurance providers, legal services, credit unions, community counseling agencies, and health promotion professionals.

The Personal Finance Employee Education Foundation web site also provides an array of free research, marketing and other educational materials for financial educators. The foundation aims to be the “Better Business Bureau” or “Good Housekeeping” seal of approval for high quality financial education programmes that reduce employees’ financial distress and improve their financial well-being. High quality financial education programmes should change employees’ personal financial behaviours in a positive direction as well as contribute to the employer’s bottom line.

The web site also demonstrates how the foundation determines its return on investment (ROI) projections using eight PowerPoint slides.The foundation works with its 12+ “Quality Providers,” and is conducting research with six employers. Research results will be available via press releases, trade publications, and refereed academic journals to document that provision of comprehensive high quality financial education in the workplace benefits both employees and their employers.

©Personal Finance Employee Education Foundation, 2008, http://www.PersonalFinanceFoundation.org Please cite this manuscript as follows: Article (book chapter) for inclusion in GTZ Case Study Book on Financial Wellness. [GTZ, a German Development agency, has been working on a public private partnership (PPP) with BMW in South Africa to facilitate an Employee Financial Wellness Program since 2005.]

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