Financial literacy deficit issues are something every plan sponsor should be aware of. Financial stress is a common challenge for many American adults. Poor financial literacy is a growing condition exacerbated by the Covid-19 pandemic. The resulting financial and economic uncertainty that has plagued everyone – plan members in particular – for almost two years.
However, a Study 2021 of the FINRA Investor Education Foundation & Global Financial Literacy Excellence Center, recently cited in BenefitsPro, shows interesting results. The article stressed that employers need to understand that the root cause of financial stress is not actually the pandemic or the debt itself. According to the study, the real cause of financial stress is a low level of financial literacy. This condition then results in bad financial behavior. Study data shows that while Covid-19 made Americans’ financial stress worse, it didn’t cause the problem!
According to the study, financial stress is caused by various problems, including lack of income, family situation and social pressures. Financial literacy is the foundation on which good financial habits and financial security are built. Research looked at financial stress as a factor in those who could correctly answer questions about interest rates, inflation, and risk diversification. These criteria placed survey respondents in the “financial literacy” research category. Based on the findings:
- 51% (vs. 63% who couldn’t answer questions) said they felt stressed about their personal finances
- 38% (vs. 55%) said they felt stressed when talking about their personal finances
Plus, high levels of financial stress only make the problem worse. This condition then leads to poor financial decision making. Previous studies have also linked this to a financial literacy deficit. People with high levels of financial stress tend to have credit card debt and other consumer loans. They also overdraw their checking accounts, make late payments, withdraw funds early from their retirement accounts, and take out high-interest loans. Additionally, this demographic is less likely to own their own home, invest money, or have emergency savings and retirement accounts.
The study found that having enough money is the key to easing financial stress. But most importantly, people know how to manage the money they have. People with poor money management skills both make poor financial decisions in the present and consistently fail to plan for the future.
Why is this important for employers? American adults don’t leave their financial stress at home – they bring it to the workplace. It costs US businesses about $ 2,800 per year per employee, according to Salary Finance, again cited in BenefitsPro. However, employees want and appreciate help in improving their financial situation. A 2020 John Hancock study, also cited in BenefitsPro, found that 86% of financially struggling employees expect their employers to offer financial wellness programs. This will reduce the financial literacy deficit.
In doing so, employers can help workers in financial difficulty in the following ways:
- Improve financial knowledge. This includes training employees on key financial topics and providing the tools they need to improve their money behaviors.
- Help workers save for financial emergencies. Even a small savings can help reduce financial stress. Financial wellness programs offer employers the ability to automate savings to facilitate savings.
- Reduce anxiety and stress. A Enrich 2019 study showed that participants in the financial wellness program experienced an average 23% reduction in financial stress over a 12-month period.
Financial well-being is good for both employers and employees. For their part, employers can help reduce the costs of high turnover, absenteeism and job replacement, as well as healthcare costs. Employees enjoy a better quality of life, higher productivity, and are happier and more engaged at work. They are also able to retire on time, one of the biggest victories of all.
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff is also the Executive Director of Plan Sponsor University and is currently a professor at Retirement Adviser University.