Studies by the Global Center for Financial Literacy define the term as “a set of basic concepts that sit at the heart of financial decisionmaking, which include: numeracy and an understanding of interest rates and interest compounding; an understanding of inflation; and an understanding of risk diversification.”
According to research by OneAmerica Financial Partners, to achieve financial literacy plan sponsors must help employees learn more about topics such as overall investment strategies, risk assessment, diversification, taxes, health care expenses and projecting and forecasting.
Why Pursue Financial Literacy?
Marsha Whitehead, vice president of Marketing and Communications, Retirement Services, OneAmerica Financial Partners, warned PLANSPONSOR that “if an employee doesn’t have the proper level of financial literacy, they may not have the tools to save enough for retirement and may have to stay on the job longer. That could make for an aging work force and higher health care costs.”
“Financial literacy and how it affects retirement preparedness is a major issue for employers. Our research shows that only 17% to 18% of employees feel that they are prepared for retirement,” Liz Davidson, CEO of Financial Finesse Inc., told PLANSPONSOR. “If employees aren’t saving enough, then you can begin to look at the cost of delayed retirement,” she said. The impact of this kind of financial stress can, in turn, cause physical stress and illness. “Employers may see more employees taking more sick time. Also, is such financial stress causing employees to take more hardship loans and have garnishments from their salaries? Employers need to realize that the financial wellness of their employees is important to the company as a whole.”
A lack of financial literacy can definitely be an obstacle to saving for retirement or for investing successfully, said Annamaria Lusardi, director of the Global Financial Literacy Center and professor of economics at George Washington University School of Business. Lusardi, who has studied financial literacy in eight countries, including the United States, told PLANSPONSOR, “There is only a minority of employees who thoroughly plan for retirement, but these employees have three times as much saved for retirement compared to those who do not plan.
“Whether it’s understanding investing or inflation or risk, financial literacy really matters, and this has been confirmed and reconfirmed through surveys.”
Lusardi added, “To build a strong company, you need a strong community of employees. If the employees are more financially fit, they are better workers, and the company is more financially healthy. Financial literacy benefits everybody.”
Financial Literacy: Whose Job Is It?
One of the biggest obstacles to achieving financial literacy among retirement plan participants is knowing what the plan sponsor’s role is in the process, according to Whitehead.
Whitehead said, “In the retirement and investment industry, we use a lot of jargon—alpha, beta, etc.—and it’s understandable that employees have a lack of knowledge in these areas. They can’t know everything. There needs to be a collaboration with outside resources, such as the plan sponsor working with the plan provider or financial advisers.”
She advised plan sponsors to work with their providers to give their employees information not only on general financial issues, but also on how to determine goals for retirement. “It’s not enough for people sit down and figure out what they’re going to need to get through retirement. There need to be general and group meetings with employees.”
And plan sponsors need to remember that it’s not just about communicating with employees, but about educating them as well, Whitehead said.
“Plan sponsors can work with their plan provider and use tools like surveys to figure out how they want to direct their educational efforts. Factors like what information needs to be delivered, how this information is delivered and how preferences differ by things like age and gender. Some employees will prefer material in paper form, while others may only look at something if it’s on a Web page or in a video,” said Whitehead.
She added, “Determining exactly what these content and delivery needs are ahead of time is helpful in that the tech stuff will be a little less intimidating to plan sponsors if the metrics of a survey show that only a certain segment of their employees will require their content in online, and that such efforts won’t require a whole new IT team to support it.”
Steps to Improve Financial Literacy
Davidson said that while it’s a problem that can be solved by instituting a financial literacy or wellness program, sustaining habits for saving is a harder thing to do. “Such efforts need to be intensive and ongoing. Using a survey, at least annually, to determine financial literacy needs is important. Every employer is different. A company may have a manufacturing arm, middle and executive management and different age groups to contend with. All of these employees have different needs.”
One way to start the process is to have employees do a financial wellness assessment online, suggested Davidson. “Plan sponsors should make sure that results are aggregated, not individually shared, and to communicate to the employees that their personal information will stay confidential in this way.”
“Also, what are the employees’ saving priorities? Employees can use these goals later as a benchmark of their progress. But obviously, it’s going to take time for these efforts to have an impact,” she added.
Employees have very specific things that they want to learn when it comes to financial literacy, said Whitehead. According to a survey by OneAmerica Financial Partners, 23% of men and 24% of women want to learn more about the collective topic of investing, investment strategies and risk assessment. “Employees also want to know how to effectively save, budget and plan for retirement factors, as well as how to deal with current debts,” she added.
Whitehead also noted: “Our own research has found that there are different ways of learning. People prefer different ways of getting information based on gender, age and other factors.”
Employees have different needs when it comes to financial literacy and saving, said Lusardi. “This can depend on their income level, education or age. And it’s not just retirement that employees should save and plan for. There should also be education on addressing debt. For example, younger employees may be struggling with paying off student loans. But dealing with other debt like credit cards, mortgages and car repairs are also important.”
Education about financial literacy should occur at important points in an employee’s career, Lusardi added, “When they are first hired, when they get a promotion, around tax time.”
When retirement plans changed from mostly defined benefit (DB) to favor defined contribution (DC) plans, that shifted a lot of decisions to the individual, said Lusardi. Perhaps too many, she cautioned. “We need to look at collapsing information so that it is simple and accessible to employees.”
In terms of delivery systems, said Lusardi, you need to know your audience. “Some people say, ‘I see it because it’s on paper. If it’s on the Web, it’s outside of my attention.’ Some research shows that most investment decisions are made based on the brochure about investments [that was] given to them by their employer. Overall, employers need to make employees more comfortable with making these decisions.”