Confronting the Looming Retirement Crisis in America

Written by  James Carlson | Originally published at Questis

American workers are not ready for retirement and it is time employers take notice.

The American workforce is badly prepared for retirement and the importance for an employer based financial wellness benefit is becoming clear.

As the population ages, millions of people are discovering shortfalls in their retirement strategies. The standard of living they planned for is becoming increasingly difficult to reach and harder to maintain.

Experts believe this problem will only grow over time. Studies show the current workforce is ill-prepared for retirement dates that are still 20 to 30 years away. For these workers, access to reliable retirement funds is worse than it was in the 1980s, underlining the critical situation that has developed for retirees over the past 40 years.

A Major Problem
The Employee Benefit Research Institute found that the U.S. median for 401(k) account balances was $18,433 in 2013. The numbers are a bit better for employees aged 55 to 64, who managed a median of $76,381. However, nearly 40 percent of workers across all demographics have less than $10,000 saved, and, as the Center for American Progress reports, more than 30 percent have no retirement savings at all. Among retirement-aged people, 19 percent are without any pension or retirement income beyond Social Security. These shortfalls are going to place even more pressure on over-burdened resources such as government agencies, charities and families that are already starting to feel the weight of the retirement crisis.

Retirement-Crisis-Figure1

Missing the Mark
When defined-contribution plans such as 401(k) and IRAs were introduced, the allure of amassing wealth tax-free through prudent investments was a promising prospect for many employees. Free money in the form of employer-matched contributions made the plans even more attractive, and workers felt they could fund a more comfortable retirement by trying their hand at investing rather than relying on a fixed pension from their employers.

These plans were also beneficial for employers who found that offering defined-contribution plans cost less than traditional defined-benefit plans. Soon, defined-contribution plans became the standard way of saving for retirement.

Retirement-Crisis-Figure1

However, 401(k) and other defined-contribution plans have two integral flaws. The first problem is that, unlike pensions that are provided automatically, 401(k) plans are usually offered on an opt-in basis. Many employees may not realize this option is available, while others may not be comfortable putting money into one or may feel that they simply can’t afford the paycheck deduction.

The second problem is that traditional pensions are designed to provide lifetime income, but defined-contribution plans carry no guarantees on returns or income. Workers who rely on these funds for retirement are at the mercy of a volatile market that can wipe out years of gains.

Beyond these two significant factors, the amount of control individuals have over their 401(k) and IRA accounts can also be detrimental. Employees are generally not knowledgeable enough about investments and financial markets to make the best decisions regarding their accounts. They may get spooked by the normal fluctuations in the market and make bad decisions, or miss out on opportunities to capitalize on favorable circumstances.

And even when employees do receive advice on their invested retirement funds, the recommendations may conflict with their goals in the name of increased compensation for brokers and other financial handlers. In fact, the fees that some financial service professionals charge can decrease account balances by up to 20 percent. This likely stems from a tendency for the industry to place its interests ahead of the employee or investor.

Considerable Ramifications for Employers
Employees can see the writing on the wall, and they are becoming increasingly worried about their futures. But companies are also feeling the effects of the retirement crisis, and it’s impacting the bottom line.

Employees who are under financial stress are less productive than their stress-free counterparts. They are more distracted, more prone to mistakes and accidents, and are more careless in their work. These employees also miss more work, often due to stress-related illnesses that, in turn, increase the company’s healthcare costs. Financially stressed workers decrease morale not just for themselves but for other workers around them who have to pick up the slack. These employees are also more likely to engage in unethical behavior, such as stealing and providing privileged information to unauthorized parties.

Employees who are uncertain about their futures are also more likely to leave the company in favor of an organization that offers better benefits. This turnover can be expensive, especially for specialized positions that gain from employees who stay with the company over the long haul.

A New Approach
The shift from defined-benefit plans to defined-contribution plans has left a void that many workers may not notice until it’s too late. This is especially true for those who already have trouble making ends meet, leading to substantial societal problems down the road. While increased consumer education regarding retirement fund vehicles is important, employers are the ones who must drive the necessary changes to solidify their workers’ retirement. They will also share the benefits of strengthening their employee’s future.

It starts with offering meaningful financial initiatives that help employees reach their retirement goals. Companies need to take a larger role in engaging their employees to ensure they are making informed decisions about their work-related retirement funds. This means providing ongoing education on retirement options, as well as automatic enrollment in the company’s defined-contribution plan to give employees a jump start. Employers also need to pay close attention to the fees and other expenses that employees incur.

Many workers have built comfortable nest eggs by making the switch from pensions to defined-contribution retirement plans. But for the millions of Americans who haven’t found their footing with 401(k) and IRA retirement plans, it has been an exercise in futility. Companies need to take a more proactive approach to protect their employees’ wealth — and their own bottom line.

Article Sources:
[1] Center for American Progress: The Reality of the Retirement Crisis
https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/

[2] NBC News : Retirement Crisis: The Great 401(k) Experiment Has Failed for Many Americans
http://www.nbcnews.com/business/retirement/great-401-k-experiment-has-failed-many-americans-n327321

[3] Financial Analysts Journal: After 70 Years of Fruitful Research, Why Is There Still a Retirement Crisis?
http://www.cfapubs.org/doi/full/10.2469/faj.v71.n1.1

[4] The Consumer Financial Protection Bureau: Financial wellness at work
http://files.consumerfinance.gov/f/201408_cfpb_report_financial-wellness-at-work.pdf

[5] The Star Tribune: The real story about retirement: Millions of baby boomers face financial crisis
http://www.startribune.com/the-real-story-about-retirement-millions-of-baby-boomers-face-financial-crisis/334718191/

Source: Confronting the Looming Retirement Crisis in America – Questis

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What is Financial Wellness?

Written by  John Tabb | Originally published at Questis

Many products proclaim themselves to fall under the Financial Wellness category. This post covers the characteristics of a true Financial Wellness Program.

According to Tom Rath and Jim Harter, leaders of workplace well-being research for Gallup, financial wellness is defined as “effectively managing your economic life.”

This simple concept encompasses many factors, including:

  • Keeping spending within one’s means
  • Being financially prepared for emergencies
  • Having access to the information and tools necessary to make good financial decisions
  • Having a plan for the future

The underlying concept of financial wellness is financial security, one of the most common goals reported by employees across all sectors. However, very few report having access to the kinds of financial services and benefits that they feel would be the most helpful. This sentiment is echoed by employers in a 2014 report from the Center for Financial Services Innovation. Most of their financial health offerings consist of limited employee assistance programs designed for crisis situations, comprising just a small part of an employee’s total health benefits package. In many cases, these programs aren’t included in the benefits package at all. What’s missing is a more comprehensive approach to financial fitness, one that helps employees build lasting financial strength and stability, leading to a more solid organization.

A Holistic Approach

Employer-based financial wellness is often seen as an addendum to other benefits, but the financial health of employees should be viewed through the comprehensive lens of other health and wellness programs that employers offer. These services don’t just take care of employees when they’re sick, but also work to prevent them from getting sick in the first place with fitness, smoking cessation, diet and lifestyle programs. Financial wellness programs should work in the same way, offering holistic support and advice to employees so they can meet short-term needs while working toward long-range goals.

Each employee has different financial priorities and obligations, so a successful, holistic wellness program requires solutions tailored to an employee’s unique circumstances. This starts with digital engagement, interviews and examination of employees’ pay and benefits records to establish a complete picture of their finances. The aim is to understand employees’ goals when it comes to paying taxes, purchasing a home, establishing and maintaining good credit, healthcare, emergency preparedness, education costs, paying down debt, saving for retirement and other parts of their financial life.

The second part of a holistic approach to financial wellness is understanding the concepts of good financial health and having the right tools to act on that knowledge. This means employees not only need education, but also the opportunity to put this information into action. For some employees, this simply means using software to keep track of financial goals. For others, having a financial coach or adviser to review their finances and offer suggestions does more to keep them accountable and engaged with their goals.

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Benefits of Employer-Based Financial Wellness

The value of a good wellness solution is felt across the organization, from employees to management and other decision makers.

For Employees

A high level of financial wellness gives employees the ability to make better, more informed decisions and manage a successful, long- term strategy. When employees have acomprehensive understanding of their finances, they can create effective strategies for dividing, and potentially automating, their paychecks between bill, savings, investments and other commitments. Employees will be equipped with the skills, knowledge, and tools necessary to develop and support successful financial outcomes.

In fact, studies show that people who regularly plan ahead for emergencies and other irregular expenses are 10 times more likely to be considered financially healthy than those who don’t, regardless of income or other demographics. Experts point to this as evidence that positive financial habits have more impact on a household’s financial well-being than an increase in income. A report by the Consumer Financial Protection Bureau found that a lack of disposable income is one of the most commonly cited reasons that employees give for not participating in retirement plans and other employer-provided financial benefits. However, if employees can make more effective use of their current funds, they may find the income to put toward their future.

For Employers

Employers feel the effects of their staff’s financial health as well. Employees in stressful financial circumstances are less productive and less likely to remain at their jobs. Pat Milligan, Senior Partner at Mercer, found that 22 percent of employees report missing at least one day of work to handle financial problems, 15 percent reported spending at least 20 hours a month working on personal financial tasks at work, and a full 20 percent have had to resign from jobs due to financial stress. And according to the Journal of Occupational and Environmental Medicine, one day of employee absence costs businesses an average of $348 in lost productivity. From that angle, ensuring that workers are free from personal financial stressors can boost a company’s profitability.

Wellness-Figure-1

Unfortunately, many companies, including those polled for the report conducted by the Center for Financial Services Innovation, don’t realize their need for a broader approach to their employees’ financial fitness until workers become reliant on emergency EAP services, increasing the costs of these programs and jeopardizing the company’s ability to keep them going. Financial wellness can help companies fight against unnecessary expenditures due to absenteeism, lost productivity and benefit cost overruns, allowing businesses to expand their benefit options to include:

  • Programs that enhance money management skills and help employees create and build assets
  • Newsletters and other periodic publications
  • Investment, retirement, college, emergency and health care planning seminars
  • Debt- and credit-related programs

A more extensive list of benefits can also help businesses attract and retain top-notch staff, as employees who are financially content are more likely to stay with the company for the long haul.

The road to financial health is an ongoing journey. Once financial wellness has been achieved, both employees and employers have a role to play in its continued progress. Establishing and cultivating financial fitness requires individual persistence, as well as a supportive environment with accessible, high-quality financial services. This will not only allow companies to realize benefits such as increased loyalty, higher productivity, and lower costs, but enable employees to meet the challenge of balancing responsible living today with wise planning for tomorrow.

Article sources:
[1] Jennifer Robison, The Business Case for Wellbeing, Gallup Business Journal
http://businessjournal.gallup.com/content/139373/Business-Case-Wellbeing.aspx
[2] The Effects of Financial Education in the Workplace: Evidence from a Survey of Employers
https://www.ssc.wisc.edu/~scholz/Research/Financial_Education.pdf
[3] Financial Wellness at Work, Consumer Financial Protection Bureau
http://files.consumerfinance.gov/f/201408_cfpb_report_financial-wellness-at-work.pdf
[4] Pat Milligan, Driving Financial Well-being: A New Multidimensional Approach for Organizations, Mercer
[5] Aliza Gutman, Understanding and Improving Consumer Financial Health in America, Center for Financial Services Innovation

Source: Questis – What is Financial Wellness