Start with a Financial Health Assessment

initiatives are:   (1) becoming much more comprehensive and (2) demonstrating tangible business value.

In our own experiences with HR professionals, we see the expansion every day.  Wellness strategies are evolving and many employers are looking to better understand how employee money issues are impacting the productivity of their organization.

Sound overwhelming?  Well, it doesn’t have to be.

If you’re looking for a simple and cost-effective way to get your arms around financial wellness, we recommend starting with a financial health assessment. Think of it as a biometric screening of an employee’s financial health. Once you understand which issues are impacting employee productivity the most, you can confidently introduce programs that address the highest priority problems.  And, with an annual assessment, you can measure the progress you’ve made and demonstrate value.

Here are some important qualities that you’ll want to look for in an employee financial health assessment:

1. Be sure it addresses the complete financial picture. In addition to retirement, you’ll want to dig into credit/debt, personal protection and basic cash flow and budgeting issues.  Just as important is measuring the level of financial stress that employees are under which can have damaging impacts on productivity.  The Personal Finance Employee Education Foundation offers a Personal Financial Wellness Scale (free of charge) well suited to measuring financial stress.
2. Be clear about your intentions.  When it comes to something as personal as money, many employees may be reluctant to share information with their employer.  We recommend that employers only view the data in aggregate and be clear in communications with employees about what the data is being used for.
3. Keep it short and offer an incentive.  In addition to effective communications, keeping the assessment to 10 minutes in length and offering an incentive will really help drive participation rates.  Many of our customers have seen success with gift cards, deposits into a 401(k) or HSA and of course cash works too.
4. Reporting should be actionable – for employee and employer.  Upon completion of the assessment, an employee should receive immediate and easy to understand feedback about how to improve their personal situation.  For employers, it’s important to recognize that at the end of the assessment all you’ve got is data.  The hard part is in interpreting it.  Be sure that you have a capable team working with you that can benchmark the results, prioritize issues and provide you with actionable conclusions.
5. On-ramp to a full solution.  So, 37% of your employees are struggling with debt issues.  Now what?  You may want to choose an assessment provider that can offer an easy transition to education and services.

Employees Remain Cautious

according to the Q4:2010 Principal Financial Well-Being Index survey.  Here are some of the key takeaways:

• Half of employees did not feel better about their financial situation than they did a year ago. Nearly 40% of employees were still cautious about the economy.
• 72% of employees are concerned about their long-term financial future.
• Health care costs (65%) and economic uncertainty (59%) topped their short-term concerns.
• Living within their means (62%) and having an emergency fund (46%) were employees’ main priorities as they re-build their financial well-being.

While this data can be helpful as a benchmark, it’s always best to assess your own employees to understand their specific concerns and issues when it comes to money.   From this assessment, you can build the most effective financial wellness programs and have the greatest impact on the well being of your population.

Other notable findings included:

• 51% of employers surveyed saw an increase in employee wage garnishments
• 42% of employers surveyed saw an increase in employee emergency loans
• 34% employers surveyed saw an increase in employee requests for time off to deal with personal financial issues
• While 88% of employers provide retirement plan education, only 28% provide basic financial education on critical items such as budgeting, debt reduction and credit management.

One thing to focus on here is that 70% of survey respondents believe financial education is important and yet only 28% claim to offer a program.  What is the reason for this gap?

Employers surveyed cite cost, sacrificed work time to attend and higher priority competing items.  Let’s talk this through:

• Cost.  There has long been a misperception about the cost of financial wellness programs.  In our experience, companies can provide a financial wellness benefit for a cost equivalent to 1-2 employee lunches per year.  Not bad.
• Sacrificed work time.  A good financial wellness solution will offer online education (24/7 access), seminars and a financial coaching benefit.  All of these items can be made available to employees outside of normal work hours.  Even if these services are being used during work hours, it is likely far less than the time spent missing work and/or distracted on the job because of personal financial issues.
• Higher priority items.  While this one is hard to address without seeing the prioritized list, financial issues are likely one of the largest drains on productivity in organizations today.  A comprehensive financial wellness solution can produce an ROI to organizations of well over 3 to 1.

So, the natural question is why a credit score of all things would be used to evaluate a prospective employee?

One likely reason might be that employers worry that a poor credit score indicates a lack of responsibility that could ultimately translate into poor performance.

Credit score indicative of a poor performer?

But there may be another important reason…or, at least there should be.  The impact of poor employee financial health on corporate productivity has been well publicized in the wake of a troubled U.S. economy.  Many employers may feel that employees with poor credit are likely to spend significant time at work worrying about or dealing with their personal financial issues.  Or, worse yet, miss work entirely.

Whether or not a FICO score is a suitable barometer for a candidate’s future success, these results reveal that in the minds of many employers, there is an important link between control over personal finances and job performance.

But what about existing employees?

Employers might make more productive use of this link by introducing broad financial wellness education to current employees, rather than simply focusing on the credit histories of a few new hires – especially considering that credit reports are often explicable or simply inaccurate.

Many states are pushing to make the investigation of credit histories by prospective employers illegal. Employers will need to find a new tactic to ensure the financial health of their workforce.  A comprehensive financial wellness initiative can be a much more effective means towards this desired goal.

Financial Wellness ROI

who “tough it out” and come to work but operate far below normal productivity. But, there are many types of presenteeism.  There could be any number of reasons why an employee checks out and productivity suffers.  And, while presenteeism is a relatively new term, you likely have some established policies in place for helping employees stay focused at work.  For instance, over half of US companies have blocked access to Facebook, Twitter and MySpace.  Presenteeism, in its entirety, is a huge productivity issue that far exceeds that of absenteeism.

To say that presenteeism is an ambiguous problem is certainly an understatement.  It’s impossible to measure, difficult to address and simply acknowledging that presenteeism is an issue at your organization tends to imply that the company is not well run.

But, you may find that you can take steps to address the core drivers associated with presenteeism.  And by taking steps to proactively address those core employee issues, you can solve a large portion of the problem.  Similar to the issue of employee stress, recent studies show that employee money issues are a major root cause driver of presenteeism.

Think about it for a moment.  If you were in debt trouble, on the verge of losing your home or had your retirement cut in half due to the recession, wouldn’t you spend time at work dealing with these issues? Even the model corporate citizen would have trouble answering “no” to this question.

But just how big is the problem?  Well, the Personal Finance Employee Education Foundation recently did some studies on personal financial distractions in the workplace.  You can estimate the annual cost of financial distractions at your organization with this calculation:

1. Employees in your organization: ______________
2. Divide by 4 (1 in 4 employees is in financial distress on average)
3. Multiple by 16 hours (distressed employees spend 12-20 hours per week at work on money issues)
4. Multiply by 12 months in a year
5. Multiply by average hourly wage of your employees:__________

For example, an organization of 1,000 employees has approximately 250 financially distressed employees.  The company loses 16 hours of productivity per month for each of these employees which results in 48,000 hours of total lost productivity per year.  Assuming an average annual salary of $50,000/year, this company incurs $1,200,000 per year in lost productivity from financial distractions.

This is just one of several important issues that drive the need for financial wellness in the workplace.  If you take the time to sit down with the numbers, you will likely find that introducing these types of programs may be one of the higher ROI initiatives you have available to you.

For most HR professionals this may seem somewhat intuitive.  Prior to 2008, many employers had built out their benefits, retirement and equity programs to compete in what was considered an all out war for talent.  So, it may not be surprising that the large investments that employers have made to offer a compelling total compensation package have made employers the number one source of financial products for their employees.

But there are some important implications of this shift.  Virtually all critical aspects of an employee’s financial plan are now available through their employer.  This includes core products that protect wealth – including disability, life insurance and many other types of insurance.  And it includes products that build wealth including retirement, college savings plans, equity compensation and many others.  The fact is, employees consider their workplace plans to be the foundation of their financial security.

When it comes to personal finance, it may be surprising to learn that many employees don’t turn to one of those name brand financial services firms when they need something, they turn to their employers.  Over the past two years, it’s amazing how many HR professionals we’ve met with have told us that their benefits call center was being inundated with financial planning questions that they were not permitted to answer (e.g. “Should I refinance my mortgage?”).  Employers have become the face of so many financial products and yet a majority of these employers are not equipped to help employees understand them, use them and benefit from them.

Two things here are certain:

1. Over half of your employees receive a majority of their financial products from you, their employer
2. As the face of so many important financial products, employees are likely turning to you for answers and assistance in securing their (and their family’s) financial futures

The question is…will you answer the call?  You’ve offered your employees a compelling set of benefits and compensation programs…will you make the investments that help employees use them and solve their financial issues?

And so what exactly are the folks in Washington trying to accomplish by dedicating an entire month to financial literacy?  Well, it’s quite simple actually.  See, the government recognizes that a key to restoring confidence in our financial system and maintaining America’s competitive advantage in the world is to provide financial education in our schools and workplaces.  And, while what we do in our schools is critical over the long-term, the best way to impact America’s reality today involves getting employers, or more specifically HR, to rally around the issue and help employees with their money.

Make the Most of Financial Literacy Month

In fact, those in Washington view the workplace as so critical to solving the financial literacy problem that recommendations have been made to extend tax incentives to employers that provide financial education (we’ll keep you updated on progress there).

You knew your job was tough, but seriously?  In addition to implementing that new talent management system, you have to restore confidence in America’s financial system?  Sounds like a lot of work.  Well, let’s take this one step at a time.  Here are some ideas for dipping your toe in the water and trying some things out come April:

• Hold a “Creative Savers” contest.  Have employees submit creative ways they personally employ to consistently live within their means and save for the future. It will be great for those who are struggling in this area to learn practical, everyday financial ideas that are making a positive difference in their co-workers lives.  And likely, while these ideas and practices can be quite creative, they will also tend to be relatively minor spending and/or saving tweaks that can be replicated in most budgets.  Have the 401(k) committee select the top three ideas, award some cool prizes to the winners and let the rest of the workforce benefit from their money magic.
• Do a survey.  Financial Literacy month is a good time to take the money pulse of employees in your organization.  A well designed survey can help employees assess their financial situation and allow you to get a glimpse of the financial stress in your organization.  If you’re looking for a credible survey, I highly recommend the Personal Financial Wellness Scale which was built based on the research of Dr. E. ThomasGarman.  Uniquely, this scale allows employees (and HR) to compare results against national norms.
• Do some seminars. Financial literacy month offers a great reason to reach out to your vendors.  You may want to start by calling your 401(k) administrator for retirement and investing related topics.  But don’t stop there.  There are a number of organizations that provide onsite financial workshops.  Some of these organizations are fee only, while others have programs where fees may be waived altogether.  If you are considering a no cost seminar provider, be sure that you understand the goals and objectives of the vendor.
• Hold a fair.  Nothing like a little free food and drink to get the attention of your workforce.  These days, so many of your employees get the majority of their financial and health products from you.   Invite your vendors and have them come with thoughtful ideas about how to help employees improve their financial health – this may include topics such as saving for retirement, how to cut health care expenses or keys to a rock solid income protection plan.  In addition, make members of your benefits and compensation staff available for one-on-one discussions.

If you implement one or more of these ideas, you may be surprised at what you learn about your employees.  Employee financial distress is pervasive and you may decide that this April cause deserves a year round effort.

In our September 09’ blog, “Rethinking the 401(k) Pitch”  , we underscored how the tax landscape had changed since IRA’s were introduced in the early 80’s.  We recounted that federal income tax brackets reached as high as 70% when 401(k)’s and IRA’s were introduced and it made perfect sense to shield everything we could from the taxman and bank on taking the money out at lower tax rates in the future

For the following 30 years, the retirement planning community coached us to maximize tax deferral benefits of the 401(k). But over those same 30 years, tax rates moved steadily downward. Currently the top federal rate is 35%, which is historically very reasonable. However, with the current out of control budget deficits and government spending, this trend may very well start to move the other way. Translation…we seem to be on a collision course toward higher taxes.

The 2010 Roth conversion affords a timely opportunity for a course correction. You can pay taxes now, hopefully before they go up, and be set for tax free distributions at retirement.  It works like this:

• If you have an existing traditional IRA, you can convert it or part to a Roth IRA. A Roth IRA allows tax-free growth and tax-free income — if you are at least age 59½ — and as long as you have held your Roth account for five years or longer.
• When you convert, income taxes will be due.  The amount converted will be added to your W-2 income.
• For 2010 conversions only, you can include the full conversion amount on your 2010 federal income tax return or you can split it equally between your 2011 and 2012 tax returns.

So the filters to making the decision to convert are…

• Do you have an existing traditional IRA?
• Do you think taxes (or your tax rate) will be going up the future?
• If you believe they are going up, do you think this will directly affect your likely retirement income?
• Do you have the extra cash to pay the taxes over the next 2 years?

If you answered, “yes” to all of the above, then a Roth conversion may be the right option for you.

To fine tune your Roth conversion decision process, you might want to model a few scenarios on a calculator built for this purpose.

First let’s consider using someone else’s money for to finance our stuff.

The financial wellness rule of thumb is that borrowing money to make a purchase only makes sense if the commodity to be purchased has a realistic chance of appreciating in value.

In other words, both the lender and the borrower should profit from the transaction. The lender benefits from the interest earned and the borrower’s asset has an opportunity to grow in value beyond the cost of interest paid.  While the real estate market has taken a recent short term hit, over the long haul purchasing the right property in the right area has a reasonable potential to achieve this objective.

But as we know, realistically, this mutually profitable borrowing scenario may not always possible.

For example, most of us need a car and it obviously is not an appreciating asset. If we have to finance a car or anything else, the key is to minimize the collateral financial damage.

Calculating the cost of borrowing

Edmunds.com has some useful calculators and I used this one to model buying a car.  My fictitious purchase was a $30K car with a $5K down payment, financing the purchase over 60 months at a currently competitive rate of 5%.  Including taxes, license and other fees, the financed amount came to just shy of $28K, making the payment $527 a month. The total finance cost over those 60 months is $31,620 or $3,620 of total interest.  The monthly interest cost then calculated to about $60/month.

I also ran the numbers as if my credit score was damaged and the best interest rate offered was 9%.  The payment popped up to $580 per month making the total interest paid over the 60 months a hefty $6,800, or $113 per month in interest.

The next decade advice for those whom the second example hits close to home, would be to live with the clunker, ride a bus or do whatever while working on repairing the credit problem. Put the extra $53 per month totaling nearly $3,200 in your pocket, instead of someone else’s.

A confluence of events, including substantial increases in the cost of health care and tough economic times have likely resulted in significant changes to many of your benefits. It is of supreme importance that you understand these changes, how they impact your checkbook and ways to optimize your benefits. Keep in mind that without a qualified change of status, you will be locked into your elections until next year’s Open Enrollment period, so the time to focus on your benefits is NOW. Don’t be surprised by the cost provision changes after they take effect and it is too late to do something about them.

Here are 4 tips for making the most of your Open Enrollment period and cutting your health care related expenses:

1. Get reacquainted with your health care plan options. This may be the most important and likely the most daunting task of all. While employers have largely absorbed the skyrocketing cost of health care (which again will see a double-digit year over year cost increase) you are also likely shouldering some of the burden. Understand the changes that are being introduced and how they will ultimately impact your wallet. Taking the time to dig into the cost provisions associated with your medical plan options will not only help to determine whether you’ve made the right selection, it will also help you to understand how to minimize your out-of-pocket expenses throughout the year. Many employers are introducing low premium/high deductible plans which can be a very cost-effective option for you, particularly if you are not a heavy user of your health care plan. Lastly, if your spouse or domestic partner also has a plan, you will want to incorporate his/her options into the evaluation process.
2. Use flexible spending accounts. So, you knew this one was coming. Any respectable list of tips for Open Enrollment *MUST* have this in their top 4 and despite this widely held opinion, only about one-third of you actually take advantage of them. Using pre-tax dollars to pay for qualifying health care (including medical, dental and vision) expenses can save you significant dollars. For example, assume a married employee with an adjusted gross income of $100,000 who files jointly and accumulates $4,000 in medical expenses for the family. This employee would save just over $1,300 in Federal taxes for the year by using a Health Care Flexible Spending Account. An added and understated benefit of an FSA is that it actually helps you to plan and save for your health care expenses through convenient payroll deductions.
3. Optimize your prescription drug benefits. This tip has more to do with saving throughout the year, rather than a decision that you’ll need to make for Open Enrollment. I mention it because it’s a great way to save money and could potentially impact your health care FSA contribution. Generic drugs are copies of brand-name drugs that have exactly the same intended use, effects, side effects, risks, safety, strength… in other words, their pharmacological effects are exactly the same as those of their brand-name counterparts. Taking a proactive approach and requesting a generic substitution for your prescription medication can cut down your copayment significantly. Use of generic drugs may also allow you to waive your deductible and avoid costs that are incurred when you use a brand name drug when a generic is available. Additionally, you may also be able to cut down on prescription copays by utilizing the mail order prescription drug benefit for maintenance medications.
4. Take advantage of Health Wellness programs. Wellness incentives have become hugely popular. In fact, almost two out of three U.S. companies offer programs to keep employees healthy, and 66 percent of those offering programs use incentives. These incentives come in a number of forms, for instance, a credit toward your health care premiums. It may be the case that your employer is introducing a similar program in 2010, so be sure to understand wellness program features, incentives and consider participation.