Beyond Social Security

Editor's Note: This column was prepared by Todd Luchik, manager of content development and research for Winning Workplaces, a not-for-profit organization that helps small and midsized businesses create better work environments.

Lost in the debate over Social Security is that no one can live on it alone. Unfortunately, many employees lack the financial savvy to manage their money and plan for retirement. Businesses can and should address this issue with their employees. To provide for themselves when they retire, workers need to educate themselves on how to manage their money today.

In the 1980s when 401(k) plans were first offered, employer-driven pension plans evolved into employee-controlled defined-contribution plans. Originally, these plans were meant to supplement, not replace, pensions. Over the years, however, they quickly grew in popularity, because they gave workers greater flexibility in investing while lowering employer expenses.

The Knowledge Gap

Today most Americans rely on defined-contribution plans for retirement; however, this shift in control from employer to employee has not led to the work force's greater financial sophistication. Far too many employees lack the necessary financial acumen to manage their day-to-day money issues, let alone save for the future.

For example, benefits managers struggle to encourage low-income employees to participate in their companies' 401(k) plans. A growing concern among HR professionals is that proposed private accounts could cause low-income workers to invest too conservatively in their 401(k) plans or to pull out of them altogether.

According to a recent Hewitt study, employees who invested little in their 401(k) accounts lacked basic knowledge about their employers' plans. For example, 73 percent were unable to identify correctly the rate their employer matched 401(k) contributions. Another 54 percent were unaware that their company offered matching contributions. More important, these employees were less likely to exhibit comfort with investing. Fifty-nine percent reported little to no knowledge of how to manage their investments, and almost half (48 percent) said they were unfamiliar with the investment options offered in their plan.

Not surprising, many workers also have a poor understanding of how much money they will need to retire comfortably. According to the Employee Benefit Research Institute's "2004 Retirement Confidence Survey," 47 percent of workers who have not saved for retirement reported being at least somewhat confident about having enough money during retirement, with expectations that the funds will come from somewhere. Moreover, the survey discovered that while 58 percent have saved, the amount is minimal.

Drowning in Debt

Employees' money management issues extend beyond preparing for retirement. Many workers are struggling to pay their bills. Bankruptcies have risen steadily since 1985, topping 1.6 million in 2004. According to a recent Work/LIFE Today article, a survey of employees at Children's Health System in Birmingham, Ala., found that employees were not participating in the firm's retirement plan because they needed every penny to pay their bills.

According to a recent Associated Press poll, half of all Americans worry about their debt, and 20 percent report worrying about it all the time. Thomas Garman, professor emeritus, Virginia Tech University, estimates that at least 15 percent of workers are stressed to the point that it affects their work. Some are spending as much as 20 hours per week dealing with personal money matters. Such distractions can be a significant productivity drain.

The Business Case for Financial Education

A number of firms successfully address money management issues by providing their employees with financial training. According to the Society for Human Resource Management, 29 percent of companies already offer general financial education for their employees. The previously mentioned Children's Health System introduced a financial education program to help address low participation in its retirement plan.

The company's benefits package included money management seminars, individual consultations, a telephone help line, and a Web site with financial planning information. Within one year the firm had 500 employees take advantage of these offerings, and participation in the retirement plan grew by 10 percent. In total, the program cost the organization $25,000, an amount it has more than recouped from increased productivity as its employees spend less time stressing over and dealing with debt issues.

A Garman article entitled "The Business Case for Financial Education" details how financial education can positively impact the bottom line:

• Increased productivity
• Reduced absenteeism to take care of personal financial matters
• Reduced human resource administrative costs to process wage garnishments and requests for payroll advances and 401(k) loans
• Increased participation in and contributions to employer-sponsored retirement plans
• Reduced Social Security payroll taxes because more workers used pretax health and dependent care
• Reduced stress over financial matters and decreased stress-related illnesses caused by alcohol and other substances
• Reduced health care premiums
• Reduced accidents on and off the job
• Improved use of and satisfaction with employer-provided fringe benefits
• Reduced turnover by attracting and retaining qualified workers
• Reduced pressure to increase salaries and wages
• Increased morale, work satisfaction, and employer loyalty
• Increased number of on-time retirements
• Reduced exposure to future litigation based on fiduciary liability as fewer retirees have financial problems

Garman estimates that the total return on investment for financial education is from 300 percent to 900 percent.

In recent years many companies have begun to realize that attending to the well-being of their employees makes good financial sense. A physically and emotionally healthy employee is a productive employee. The same can be said about an employee's financial health. The fiscally solvent employee also is a happier, better-focused employee. When companies prepare the work force for retirement, they are not only bettering society, but their business as well.

Winning Workplaces, 1603 Orrington Ave., Suite 1880, Evanston, IL 60201, 847-328-9798, fax 847-328-2224, info@winningworkplaces.org, www.winningworkplaces.com