What Stands Between People and Their Financial Benefits?
In part two of our series on what stands in the way of people and their benefits, we explore the critical role financial benefits play in employee satisfaction and retention—and the common barriers that need to be overcome.
Part one of our series focused on health benefits, examining why even after a health plan is chosen, people continue to face challenges with engagement. The same issue occurs with financial benefits. Every employee has different financial priorities they’re trying to balance, yet many struggle to engage with their benefits to achieve those financial goals.
When employees understand the dramatic impacts their financial benefits can make on their lives, such as a consistent savings plan, or student loan assistance, they tend to appreciate their total compensation package more and feel more compelled to stay with their employer.
The first step? Helping workers comprehend the details of their financial benefits.
Making the complex understandable
As with health benefits, financial benefits can appear complicated and difficult to understand. Employees may not be comfortable with terms like compound interest or time value of money, or the advantages of paying off the principal on debt early. But, if you can provide easy-to-grasp examples that show the great results of simple choices, you will go a long way toward improving engagement.
For example, there are many reasons people might get excited about a salary increase. Will that raise support a new car lease? Fund a vacation? Finance a bigger home for a growing family? The list of ways to spend a raise is limitless—so what if you could change the mindset and encourage employees to save the raise instead, through an automatic deduction?
In the long run, the employee who chooses savings over spending will generally be better off financially. For instance, they may have the necessary funds if an emergency or unexpected expense arises, or they’ll be able to pay off student loan debt quicker.
Furthermore, when employees recognize that these life-changing impacts result from smart use of financial benefits, they will be more likely to appreciate the long-term financial perks their employer helped provide—in fact, 62% of employees look to their employers for support in achieving financial security through benefits.
Messaging employees about financial benefits in this way is certainly a perspective shift, and it’s one that requires education, reinforcement, and periodic nudges to stay on track. But it’s well worth it.
Why is this important?
Most people spend right up to the maximum they can afford. Savings rates in the United States are among the lowest in the developed world. Yet, those who understand how to use their financial benefits may be more likely to save and manage their finances more effectively.
It’s not necessarily the people who earn the most who are the most financially secure—it’s the ones who manage to save the most. Shockingly, the average savings available to those approaching retirement (ages 56-61) is less than $165,000. In order to be prepared for retirement, financial experts say one should have at least six to seven times their annual wages in savings. This concept can be illustrated in examples like the one below:
Fred uses his $800 per month raise to buy a new luxury car right away, making payments over several years. Ted, on the other hand, uses his $800 per month raise to open an IRA and continues to invest in that account over time.
In 20 years, Fred will have little to show for that raise. Ted, on the other hand, will have an additional $175,000 in his IRA, assuming a 6% return. If future raises are also added to retirement savings, it is conceivable that Ted will easily have what he needs for retirement, in addition to other desired expenses he may have put off while he was saving.
Consistency over time is the key to reaching those goals. If you are just starting out and can put away $800 per month for 40 years, the $175,000 does not merely double. Instead, you could expect nearly $750,000 in retirement savings from that single investment. Time is your biggest ally.
Sharing examples like this as part of a communication and education strategy can help employees appreciate the long-term importance of the decisions they make about their financial benefits.
The growing importance of financial benefits
According to the Willis Towers Watson 2018 Emerging Trends survey, education and financial benefits are being viewed as essential, rather than simply “nice to have.”
Financial benefit packages most often include 401(k) plans, defined benefit plans (pensions), stock options, and deferred bonuses. However, according to the survey, 8% of employers offer student loan consolidation programs—and that may increase to 34% by 2021. Additionally, more than half of all respondents to the survey offer some form of financial planning and counseling service, which could increase another 10% by 2021.
These voluntary benefit programs help employees customize their total compensation to meet their individual needs at different points in their life. Student loan consolidation, matching savings contributions from employers, programs for children’s college education, and financial planning services can often be provided more cost-effectively through large employer groups (compared to an individual seeking these on their own).
It all comes back to the nudge
As important as examples and education are, employees will also benefit from periodic nudges and reminders to evaluate where they stand and whether changes need to be made in order to reach their personal and professional goals. A periodic reminder about the need to save and invest at least 10% to 20% of an employee’s compensation can help keep employees on track toward their retirement goals, for example. Providing a scorecard and monthly or quarterly status reports can also keep financial benefits more top-of-mind.
But with every employee having a unique set of financial priorities and circumstances, it’s important to remember the experience and learning process will look different for each of them. One size does not fit all. Helping employees understand the fundamentals of financial benefits engagement can make a dramatic difference in their lifestyle and overall well-being—and, ultimately, help employers retain great people.
Want to know the keys to removing barriers between employees and work/life benefits? Check out the next installment of this series.