Fostering financial wellbeing to promote organizational and individual resilience

Employers are confronting a workforce evolution defined by shifting roles and aging talent that affects attrition, retirement and workplace agility. Notably, a recent study found that debt negatively influences retirement savings for 43% of workers.¹ When there’s a desire to retire but a lack of financial ability, the delay drives up the direct or indirect costs of salaries, healthcare benefits, presenteeism and talent acquisition.

These factors all impact employee goals and business results. Yet most organizations (65%) are unaware of their financial exposure related to overextended employment.²

Fostering financial wellbeing can promote organizational and employee resilience, and research provides a useful framework for exploring this idea. It’s based on three characteristics of resilient behavior that include the ability to accept reality, find meaning in beliefs and values, and show exceptional resourcefulness.³

Make the connection between financial wellbeing and resilience

Accepting reality

Related to retirement readiness, the transition from a more paternalistic defined benefit (DB) plan to defined contribution (DC) plans — focused on individual responsibility for investment strategies — has accelerated. So a key question is whether employers and employees truly understand and fully accept the facts and implications of their current situation.³

The Pension Protection Act of 2006 aided retirement plan asset allocation through default investment options, including target date fund enrollment, automatic deferral increases and auto-enrollment. However, the market for educational resources was slow to mature. An unfortunate consequence is that many employees now lack the financial literacy required to make decisions that help secure on-time retirement.

And this could put them in a bind when medical expense estimates for the average couple at this life stage have reached $285,000 in today’s dollars — not including long-term care.⁴ To manage this reality effectively, employees need direct education on retirement expenses such as likely changes to Social Security, increased life expectancy and average medical expenditures after age 65.

A review of workforce evaluation findings can shed light on a lack of retirement readiness within a specific demographic, and help identify particular stressors among that population. For example, an analysis could reveal a lower than necessary savings rate for millennials, or a higher than normal loan or hardship withdrawal rate for mid-career employees. These findings suggest more precise targeting with customized outreach and communications specific to their needs.

Finding meaning in beliefs and values

Resilient people and organizations have strongly held values and beliefs that serve as a foundation for interpreting and shaping their environments and experiences for the better. In fact, one important pathway to creating a culture where people can thrive and perform at a higher level is developing and sustaining financial wellbeing as part of an overall employee wellbeing strategy.

Financial wellbeing programs are in place at 28% of organizations, where they signal a firm commitment to help employees save, spend, invest and plan for their financial future.² Whether employers are just getting started or expanding their programs, it’s important for them to understand the one they currently have.

A clear grasp of available resources, and how they support employees’ financial decisions and retirement preparation, is a key to success. Examples of these assets include tools offered by the recordkeeper as well as plan design benchmarking and trends. The plan and individual outcomes should be regularly revisited to determine any adjustments needed to meet the retirement readiness target.

Showing exceptional resourcefulness

Resilient people and organizations don’t muddle in the murk of circumstance; they look to invent solutions and construct the new reality to which they aspire. There are many ways to improve financial resilience, including educating employees, using existing support tools differently, applying behavioral finance principles and tracking market innovations.

Research shows top-performing employers that excel at managing HR and healthcare costs are more likely to offer financial education resources.⁵,⁶ Many foster financial wellbeing by evaluating the alignment of resources to each life stage and phase of the financial journey. Effective communication on topics, including regular projections of DC balances to age 65 and conversions to income streams, helps translate the real-world impact of savings at each point along the timeline.

Use existing tools in new ways

Resilient organizations find ways to repurpose the tools they already have — including health savings accounts (HSAs). While it’s common to position HSAs as a medical benefit (71%), highlighting their retirement value (15%) can encourage more savings.² Another HSA selling point is their triple tax advantages. Contributions reduce employees’ taxable income, their account earnings accumulate tax-free, and account distributions for qualified medical expenses remain tax-free.

Apply behavioral finance principles

A direct method of increasing employee savings is to drive retirement plan participation by limiting investment options. For every 10 funds added, participation drops 1.5%–2%,⁹ yet most employer plans offer 11–20 (44%).² The Department of Labor mandates a minimum of three options for diversification purposes — the same number that participants typically use.⁸ Generally, choice is seen as a positive, but too much makes differentiation challenging.

Track market innovations

Evaluating market innovations can uncover opportunities to enhance and adjust tools to better fit workforce needs. For example, participants in or nearing retirement may want access to a retirement-specific tier to make withdrawing funds less complex and more predictable. Another option, offered by 47% of employers, is a managed account service that provides individuals with a customized asset allocation.² This may be a good fit for a diverse workforce with different financial profiles, or for individuals who need a personalized approach to their investment portfolio.

The overall key to resilience is working constructively to improve what’s manageable. Prioritizing employees’ financial wellbeing — with the support of direct communications, repositioned resources and innovative offerings — helps alter their near-term spending habits and financial stressors for the better. Long-term savings can then follow, improving on-time retirement and real-time business outcomes.

This article is an excerpt from our 2019 Organizational Wellbeing & Talent Insights Report – U.S. Edition.

Contributors:

Bruce Johnson
Area Senior Vice President, Actuarial & Retirement Services

Bruce leads a team that provides actuarial retirement consulting services to clients. Recent areas of focus include the development and implementation of plan termination strategies, and the overall retirement readiness of employees and how that impacts the organization.

Scott Sherman
Area Vice President, Great Lakes Region

Scott designs, develops and delivers customized retirement strategies with the right funds, reasonable fees and trustworthy fiduciary management to meet organizational objectives. Working across the full retirement and financial spectrum, he guides clients in creating efficient, strategic programs that integrate with total rewards.

Endnotes:

¹Employee Benefit Research Institute, “2018 Retirement Confidence Survey,” April 2018
²Arthur J. Gallagher & Co., “2018 Retirement Pulse Survey,” May 2019
³Harvard Business Review, “How Resilience Works,” May 2002
⁴Fidelity, “How to plan for rising health care costs,” April 2019
⁵Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Midsize Employers,” April 2019
⁶Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Large Employers,” April 2019
⁷Vanguard, “How American Saves 2018,” June 2018
⁸U.S. Department of Labor, “Meeting Your Fiduciary Guidelines,” September 2017
⁹Maureen Morrin, Rutgers University; J. Jeffrey Inman, University of Pittsburgh; Susan M. Broniarczyk, University of Texas, Austin; Gergana Nenkov and Jonathan Reuter, Boston College, “Investing for Retirement: The Moderating Effect of Fund Assortment Size on the 1/n Heuristic,” January 2012