If ever there was an appropriate time to focus on personal financial wellness that time is now. The current economic downturn is only matched by the financial crisis of the late 1970s and early 1980s. Researchers estimate that at any one time 15 percent or more of an employers' workforce is struggling with personal finance wellness.
In financially challenging times, such as the present, the percent is higher. Consider some personal finance facts. For most employees their home is their most valuable asset. In the recent economic downturn home values decreased, on average, by more than 20 percent in the US. For the hardest hit states the percent is higher with Nevada topping the list at a crushing 53 percent.
The good news is that this decline appears to have hit bottom. The Case-Shiller index indicated that in recent months housing values increased slightly by 1.6 percent. The bad news is that housing values are still quite low and not likely to return to 2006 levels - soon or ever. So the great number of people whose mortgages are greater than the value of their homes won't get any relief soon.
According to the most recent statistics, you can expect that about 22 percent of your workforce is under water. This 22 percent is the national average. Rates vary considerably from state to state, so your company's best estimate is the state statistic. According to a recent Core Logic report, "Nevada had the highest percentage of mortgaged properties in negative equity at 59 percent, followed by Florida (43 percent), Arizona (40 percent), Georgia (36 percent) and Michigan (33 percent)."
These top five states combined account for 34.1 percent of the total amount of negative equity in the U.S. The personal financial wellness picture doesn't improve much when we look at other aspects of employees' personal finances. Historically the US average household savings rate is 8 percent.
Between 1972 and 1984 the average savings rate was 9.8 percent. In the last dozen years (2000 - 2011) the savings rate averaged 3.6 percent. The trend is slightly better in the first six months of this year, 3.9 percent, but has changed little since last summer.
Since 2000, while debt was growing, real growth in income was flat and has declined since 2008. Currently, the average household income, adjusted for inflation, is $50,000. This is equal to the average household income in 1996 and represents a decline of 5.7 percent since the "economic recovery" began in June 2009 (Sentier Research, August 2012).
So households have lost home equity, are not saving, and their incomes are not growing. What would really create the perfect storm is to increase debt. Well, the perfect storm hit us. Household debt as a percentage of disposable income rose from 68 percent in 1980 to 128 percent in 2007.
By the end of 2011 it dropped to 112 percent, still very high historically. So it is not surprising that the rate of personal bankruptcy rose from 5 percent to 10 percent between 2006 and 2012.
Impact of Personal Financial Wellness in the Workplace
Significant numbers of your employees have lost 20 percent or more of the equity in their homes and 22 percent are underwater. Consequently many of them cannot relocate if the business needed them to do so. Many employees are not participating in the company 401K plan at all or fully, nor are they saving for their retirement.
An employer can be sure that 15 percent to 20 percent of their workforce has debt service ratios that are well over the recommended levels. For these employees, their ability to remain free from debilitating stress, remain engaged in their work, and maintain acceptable levels of productivity are significantly reduced. Researchers have demonstrated that there are significant costs to a business when the personal financial wellness of a portion of their employees is suffering.
Every employer wants a fully engaged workforce. That's common sense. But for many years employee engagement was just a nice phrase to include in the CEOs speech or in the annual report. Now more business leaders are taking employee engagement seriously and for good reason. Research indicates that the business benefits from high levels of employee engagement are substantial.
One study among 700 mid to large US businesses found that companies with a business culture that supports employee engagement had 17 percent higher sales. Another study of the accuracy of business analyst's predictions of companies' profitability (they are very accurate) indicated that analysts routinely under-predicted by 7 percent the profitability of organizations with high employee engagement and over-predicted profitability of companies with low employee engagement by 7 percent.
What can an employer do?
The obvious action an employer can take to change employees' financial behavior is to offer personal financial education. Studies show that companies that implement financial education programs reduce employee financial distress, increase employee engagement, and reduce direct costs associated with low levels of financial wellness.
Teaching the right stuff is important for the success of a Personal Financial Wellness program. Many employers believe they provide sufficient Personal Financial Wellness training when the company that administers the 401K plan delivers a program about retirement. Doubtless some useful information is provided, but too often the instruction is focused only on retirement; or worse, the instructor is a sales person promoting the services that benefit the 401K administrator's bottom line.
A better choice is to offer a broad educational program that addresses a wide range of topics such as personal financial data, cash flow, taxes, retirement, company benefits, to name a few. A best practice for increasing employees' self-awareness of their financial knowledge is to administer a test of personal finance knowledge. Employees who take such a test will then be aware of their personal strengths and areas in need of improvement.
With this self-awareness, employees can focus their time, efforts, and select the courses most suited to their personal financial wellness development needs. Another key component of financial behavior change is self-management skills. As stated by a renowned psychologist Albert Bandura, "Self-management is good medicine.
If the huge benefits of these few habits were put into a pill it would be declared a scientific milestone in the field of medicine." Self-management competence is mastery of a set of interconnected skills for proactively managing one's own beliefs, images, behavior, and emotions in a manner that facilitates achievement of desired goals. Those who have mastered self-management are open to feedback, self-aware, and introspective.
They are aware of the beliefs, images, behavior, and emotions that inhibit their success and they set goals and take actions to change the beliefs, images, behavior, and emotions that interfere with success. The application of self-management to Personal Financial Wellness is new.
The value of self-management has been demonstrated time and again with school children, athletes, and for physical health wellness. For example, school children who possess a goal mastery orientation are more successful in school. They experience less anxiety in the learning situation, they are not seriously set back by failure, they try harder, more often monitor their progress, and they are not afraid to try challenging learning tasks.
The same is true for athletes of all ages. In one study, college and high school athletes who had a strong sense of personal control and a mastery goal orientation (small feasible steps are better than large very challenging steps) performed better in practice situations and in the game or competition as independently rated by their coaches.
There is a great deal of evidence for the importance of self-management skills for good health. For example, in a study of middle-aged and older adults, identified that personal control was a key predictor of health at both stages of life and differentiated healthy from unhealthy lifestyle habits. In short, self-management skills are critical to behavior change.
Calculating ROI
Determining the benefits in dollars of a Personal Financial Wellness program is a useful exercise. This can be a very challenging task but with a few simplifying and reasonable assumptions we can make the task much easier. There are three elements to the calculation. After each element is calculated separately we can add up the elements to obtain the value in dollars of the Personal Financial Wellness program.
We then simply subtract the cost of the program to obtain the ROI. The first ROI element is money associated with employees' failure to save money in 401K accounts, flexible spending accounts, or health savings accounts. This is the easy data to collect. The second element is employee engagement. The easiest way to estimate this is to apply the rule of thumb that for every 100 employees on the payroll your company loses 22.5 person days of productivity per year due to financial distress.
Then do the arithmetic. The third ROI element relates to employees who cannot retire when they had hoped to retire. There are two types of costs for these frustrated employees- one associated with higher health care premiums and the other is due to higher wages paid to higher tenured employees who have not retired.
We all appreciate the value that older employees bring to the workplace, but for those who want to retire and can't, financial wellness education makes a difference. So, when you add up all these costs and compare them to the cost of financial education the ROI is very large and the payback period is pretty immediate. Here is an example for a 1,000 person company.
Summary
Substantial portions of your employees experience serious personal financial distress each year. The financial well-being of employees has declined during the recent economic crisis. Employees are stressed. Stress is the source of significant health problems. The stress also reduces employee engagement which in turn reduces productivity. Employees who wish to retire but who are unable to do so because of personal financial difficulties create costs to the business.
These costs include lower productivity, higher health care costs, and higher payroll costs. There are also direct costs associated with higher FICA taxes and benefits administration costs. Taken together, the benefits of assisting employees to understand and self-manage their physical and financial wellness are compellingly large.
About the Authors
Paul Squires, Ph.D., President, Applied Skills & Knowledge 100 East Hanover Avenue, Suite 402, Cedar Knolls, NJ 07927E- Mail: paul_squires@appliedskills.comwww.AppliedSkills.com Paul is president of Applied Skills & Knowledge, Inc. He is an industrial psychologist with twenty-five years of experience with organizational assessment and design, process improvement, training development, performance management, assessment development and validation, computer-based training and project management.
Prior to starting AS&K in 1999, he was Vice President and Practice Manager for Assessment Solutions Inc. Training and Development Services. Paul's client list includes PricewaterhouseCoopers, KPMG, Merrill Lynch, Bristol-Myers-Squibb, IRS, Siemens, Department of Labor, Motorola, Hewlett-Packard, Avon, Novartis, to name a few.
In addition, Dr. Squires has authored over a dozen journal articles and books on human capital, training and measurement topics. Prior to his consulting career, Paul held senior positions at AT&T Corporate Human Resources with primary responsibility for selection, testing, employment and staffing, internal staffing systems and employee development.
He was Director of Lucent Technologies Microelectronics International University responsible for developing a single world-wide training organization providing support to 18,000 employees. Paul holds a Ph.D. in Educational Psychology & Measurement from Fordham University and is an adjunct professor at Fairleigh Dickinson University.
Richard Lofredo, President and Founder The Financial Literacy Group, President and Founder, is a successful entrepreneur with over 25 years of experience working in the Financial Services Industry. Richard integrates professional, personal financial expertise when conducting financial education workshops for Fortune 500 companies and not-for-profit organizations.
Richard graduated from Ramapo College of New Jersey with a Bachelor of Arts degree. He is credentialed from the American College as a Chartered Financial Consultant. Richard is also an active member of the New Jersey Chamber of Commerce and the Society of Human Resource Managers.
He understands the opportunities and challenges faced by individuals and corporations. His strength is in understanding his client's uniqueness and building long lasting relationships. He is an independent, creative thinker. In October 2008, Richard founded The Financial Literacy Group, LLC.
The Financial Literacy Group, LLC delivers financial education through interactive financial wellness workshops, one on one counseling and online reinforcement tools.
