Failure to manage short-term financial obligations such as budgets, debt and savings can have a lasting impact on financial health and retirement readiness, according to an independent study by retirement consulting firm AFS 401(k).
The survey found 38% of employees said they don’t feel comfortable with their current debt. Of that percentage, 42% don’t check their credit reports annually, 62% don’t pay their credit card bills in full every month, and 71% said they don’t have at least three months’ worth of emergency savings.
However, the firm also found that a majority of employees are seeking help facing these challenges, and many are turning to their employers.
Speaking with PLANADVISER, Alexander Assaley, managing principals with AFS 401(k), says effective financial wellness programs can help. He explains that successful wellness programs typically combine financial literacy content in a range of media, incentive-based challenges to drive financial behavior, and one-one-one coaching and advice to personalize the experience.
He stresses that while retirement savings is critical to financial wellness, employees typically won’t make the most of it if they’re struggling to meet short-term financial obligations.
“What we’ve found is that regardless of their age or income, if employees aren’t getting access to financial literacy tools, resources and educational advice that helps them make wise financial decisions for today and tomorrow, they can create negative impacts on their long-term financial future and retirement,” says Assaley.
Moreover, the firm found that mishandling one financial obligation can have a ripple effect across their entire financial well-being. For example, AFS found that those who don’t have at least three months of emergency savings tend to fare poorly on the other two aspects of financial wellness, compared to those who do have at least three months of emergency savings.
Out of the non-emergency savers, 44% say they don’t feel they have cash flow under control, 66% say they don’t pay off their credit cards in full every month, and only 14% are retirement ready. Out of those with adequate emergency savings, 86% feel they are in control of cash flow, 60% say they pay their credit card bills on time each month, and 31% are on track to meet their retirement goals.
Clearly, financial wellness programs can benefit from explaining the various factors of financial wellness, while also getting workers to take action toward meeting this goal. The educational component can come from print and online educational materials, webinars, group sessions, and individual meetings. But a crucial component to any financial wellness program is its ability to drive action and change behavior. Assaley points to incentive-based challenges that motivate employees to engage with these programs, while being rewarded with various incentives such as cash bonuses or reduced premiums for health benefits. One example AFS presents to clients is a 90-Day Budgeting challenge in which employees play a mobile game to meet different financial milestones and are rewarded.
“I would be very excited for a future in which there is more flexibility inside the retirement plan, where you can use different kinds of incentive-based programs to reward employees with something like an additional employer match or discretionary contribution,” explains Assaley, noting that such a move would require some regulatory change.
However, one financial wellness program may benefit one company and flop with another. Assaley recommends taking a customized approach that considers the specific needs and preferences of a particular work force. He says this can be done with various surveys, assessments, and one-one-one counseling that can provide “a good amount of data about the demographics around the organization, as well as the financial challenges and obligations that are most important to them.”
And despite advances in technology, the firm finds that financial professionals can learn a lot from employees and help them through one-one-one sessions. The survey found 63% of respondents prefer one-on-one meetings with financial professionals.
But over the last few years, financial wellness has become a buzzword in the industry and a lot of money has been pumped into creating programs around this concept. So, is it a bang for the buck? Research suggests some financial wellness providers are not doing it right.
NEXT: Does Financial Wellness Work?