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 toconsistently 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.

“No Gold In State” was the title of this week’s article about California in The Economist magazine.  The article chronicled, “At one point during his desperate campaign for six ballot measures meant to reduce California’s gaping budget deficit, Arnold Schwarzenegger, the governor, pleaded with voters not to make California ‘the poster child for dysfunction.’ But on May 19th they did exactly that.”

The sludge-like layers of complexity that have become the California budgeting process all seem rooted in the inability of politicians to grasp the flow of money….basically economics 101.  And yet, when was the last time we heard someone running for office talk about their financial education or their qualifications for office because of their responsible economic track record?

Setting better boundaries by rewriting the State’s constitution may be a good start but I’m thinking our future depends upon something a little more homespun.  Let’s get this money thing right in our families. First, raise financially responsible kids and then later as adults we can send them off to run the government.

So parents, consider rewriting your family’s “constitution” to lend the same emphasis to money smarts as you do reading and math smarts. And the sooner, the better.  Scores of college kids get bushwacked by loans and credit card debt before they even graduate. A study conducted by The Project on Student Debt indicated that nearly half of all graduating college seniors enter their careers with 5 digit debt.

Helpful websites are popping up that simulate real life money situations and are targeted at the younger set.  A good example is Savings Quest which looks like it’s directed at the pre-teen – teen crowd.  In a colorful, narrated eLearning format, it walks the viewer through choosing a job, building a budget and saving for both short and long term goals. And importantly, even though it sort of feels game-like, the choices and resulting consequences can create some real life feelings.

Did I think it’s appropriate for pre-teen to teens? Sounds about right for those legislators in Sacramento.

After 2008, although our values didn’t change, it seemed time to be more intentional with our money.  While we didn’t want economic fear to dictate our lives the reality was, things were different. Both as a family guy and professionally, as a financial educator, I found myself wanting to reassess the foundations of my core money beliefs.

This led to researching and compiling four different tools to look at several personal financial indicators. And since collectively, the data really felt like a good reading of our financial vital signs, we started calling the suite of tools, “Money Pulse”.  Descriptions follow:

• The Personal Financial Wellness Scale – Wanting to gauge our current level of financial stress we found this simple eight question survey authored by Dr. E Thomas Garman, a Virginia Tech professor.  The resulting composite score also benchmarks our results against national averages.
• Risk Tolerance Assessment – most of us have done have taken one of these but we wanted to find one that was not associated with any financial provider.  We found one that was sort of fun to take and yet had a fairly deep scientific approach. It was developed by another Virginia Tech finance professor, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at Kansas State University.
• Essential Spending – We use Quicken but it still can get complicated to track where our money is going. So we built a simplified spreadsheet that only provided two categories of expenditures designations …Essentials and Non Essentials.  We wanted to find out how little we could live on if need be and where we could save on non-essentials.  Hmm, in which column does a latte’ belong?
• Dream Survey – With all this hunkering down talk is there do we have to give up our financial dreams? Good question but in the process of trying to answer it, we found out our money dreams were not very well defined.  So we came up with a few questions that prompted our thinking about a hoped for future …and chart a better course to reach our destination.

Going through the Money Pulse process required digging a bit deeper into our money beliefs and practices, but given that financial issues seem to weave into our lives on a daily basis, it felt right to better understand the story our money was telling us.

So what’s the problem? Evidence suggests that economic and financial stress is damaging health across gender lines but apparently affecting women to an even greater degree. According to 2008 American Psychological Association’s Stress in America survey more women than men (84 percent to 75 percent) expressed fear about the economy, and many reported new physical and emotional symptoms, such as headaches, irritability, insomnia, fatigue, overeating and chest pain.

With this kind of evidence, why aren’t we more proactive in preventing this stress from taking such a toll on our health and wellbeing? We know that the medical side of the health/wellness movement took a dramatic turn as they discovered it was both healthier and less expensive to prevent disease than to treat it after onset. Similarly, ask anyone who has ever tried to dig themselves out of a financial hole, it is always more stressful and expensive to dig out of a money pit that stay out of one in the first place.

I’m convinced that much of the problem can be attributed to a couple of reasons…first, there’s too much financial information for us to process and secondly, the communication of money concepts are often overly complicated.  In the past few weeks, I have been discussing pros and cons having tons of data within clicking distance.  Information, and even education, is only valuable only if we have a simple way to determine its relevance to our personal situation and forge a confident, clear path toward decisive action.

So taking off from last week’s example where we looked breaking down a complex topic like Estate Planning by forming a few simple, high level questions, let’s consider something similar for managing money in tough times.

The big picture money questions in tough times are:

• Do we need money for an essential expenditure or a non-essential expenditure?
• Am I going to spend within the next 5 years or beyond the next 5 years?

I will explain the five year timeframe in the next blog, but with these simple questions we can create four buckets of money and form very straightforward action plans for each. The four buckets are…

• Esssential, Now (less that 5 years)
• Non Essential, Now
• Essential Future(more than 5 years)
• Non-Essential Future

Next week… walking through simple money management strategies for each of these buckets.

In discussing the topic of Financial Wellness with the HR Director of a prominent Silicon Valley tech firm, she commented her employees had an almost universal reaction to the economic fallout of 2008… they were more or less frozen. That is, they didn’t know what to do, therefore did nothing and were financially stuck. In fact, she noted that they still are. This is precisely what happens when we don’t have a plan or framework to help us process the inevitable unpredictability of our financial life.

As a specific example, I’ll use what most of us would agree is a complex financial topic… Estate Planning. Responding to employee questions from corporate Estate Planning workshops over many years, common misconceptions about Estate Planning include that it only is a pertinent topic for wealthy people or that it is something that only needs to be addressed by the elderly. Both of these assumptions are just flat out incorrect and, of course, create barriers to take needed action.

So how can we build a simple Estate Planning framework that will help create the momentum we need to move forward? Start with the broadest questions. There are the three basic components that need addressing.

1. Living Care – I’m still alive but I need care and management of my financial affairs
2. Dependent Care – Whether alive or dead, I can’t care for those who depend upon me, who will and how?
3. Assets – Who gets what and when?

These high level broad questions are the essence of Estate Planning and for that matter, building helpful frameworks. For example, if you don’t have documented, written answers to these Estate Planning questions, it is hopefully somewhat disturbing and should spur you to want to know the next steps. I recommend going one step further to own and internalize the required actions. How about, “whether alive or dead, I can’t care for my daughter, Tess… who will and how?”

Next week, a framework to help us with money management in tough times.