Financial literacy and wellness are closely related, and both can affect how a retirement plan participant manages personal finances—and how finances are managed has a direct impact on preparing for retirement.
Most workers (95%) responding to a LIMRA survey said they believe financial literacy is important, but their takeaways can vary. Just one third (35%) feel they are moderately or extremely knowledgeable about financial products and services, and only 28% indicated they are very confident in their abilities to make important financial decisions.
Most employees said retirement was their top financial concern, followed by budgeting and managing debt, investments, overall financial planning, insurance, college planning and tax planning, according to Four Seasons Financial Education, a financial wellness and education services provider.
One problem plan sponsors and plan advisers need to face is the generally low level of financial literacy among Americans, even those who contribute to a 401(k) plan or other workplace-based retirement account. In a study by the National Association for Retirement Plan Participants (NARPP), fewer than half (49%) of participants correctly answered eight basic questions to assess financial literacy.
Think someone needs to be a chief financial officer to score well on such a test? Think again. In a survey of LinkedIn users, more than a third of respondents who identified themselves as chief financial officers, chief executives or chief operating officers did not answer all five financial literacy questions correctly.
Financial wellness through workplace programs has been gaining traction over the last year or so. Aon Hewitt found that a growing number of employers realize basic money management plays a critical role in an individual’s financial well-being. About one-quarter of employers say they’re likely to provide some assistance to employees to help with budgeting, with the goal of making sure workers are able to manage their daily living expenses.
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Plan sponsors are beginning to realize that the best-designed plan won’t work to its fullest if workers are hampered by loans and poor financial habits.
Helping a workforce learn to handle finances can raise productivity. Financial Finesse, which provides workplace-based financial education, found in a study that 85% of employees feel some financial stress, and according to Pew Research, at least four in 10 employees are stressed about an approaching retirement, usually because they have not saved enough. A study by the Society for Human Resource Management found that 85% of employers believe financial stress lowers productivity.
PwC, the professional services network, points out solving an employee’s financial issues can also help to solve his or her health issues as well, potentially even lowering a company’s health care costs in the long run. In fact, according to Financial Finesse, health care costs for employees who participated in a financial wellness program dropped by an average 4.5%. Costs for non-participants rose by an average 19.4%.
Typically, financial wellness programs are paid from the company’s general budget, but if plan sponsors need another way, they might look in the Employee Retirement Income Security Act (ERISA) or even their own summary plan description (SPD). Many qualified plans are designed to permit the use of plan assets for some education programs, and ERISA doesn’t frown on the practice, according to Four Seasons Financial Education.
One consideration, when implementing a financial wellness program, is that some participants may perceive such programs to carry a stigma. Jellyvision, a provider of interactive employee communication software, found in a survey that some workers believe attending a financial wellness classes might indicate a lack of financial fitness. A benefits communication specialist with the firm said he suspected there might be barriers to participating in financial wellness programs. “We know [employees] don’t like sharing health care needs with coworkers and employers, and we wanted to see if that applied to financial needs.”