“Financial Literacy and Workplace Productivity”

Georgia Consortium for Financial Literacy

Federal Reserve Bank of AtlantaAtlanta, Georgia - April 26, 2007

Presented byE. Thomas Garman

Professor Emeritus and Fellow, Virginia Tech University

©Personal Finance Employee Education Foundation, Inc., 2007.

USA System of Retirement Income

SecurityThe metaphor is a

3-legged stool:

1. Social Security2. Employer

provided pensions

3. Personal savings

USA Retirement FinancesDefined-Benefit Retirement

Pensions(DB Plan = Monthly checks for life) Most USA workers earn Social Security

Administration credits during their working years, and retirees are eligible for a SSA defined-benefit pension.

• Example: $1,000/month Aged adults who never worked and those

with limited income and resources are eligible for SSA-administered Supplemental Security Income defined-benefit pension.

• Example: $300 to $600/month Some working employees qualify for and may

receive an employer-sponsored defined-benefit pension. In 1981, 112,000 plans covered 37% of workers; now 31,000 plans cover <20%

• Example: $800/month

USA Retirement FinancesDefined-Contribution

Retirement Savings Plans(DC Plan = Lump sum at retirement to manage)

Employer-sponsored voluntary retirement plans for individually accumulated savings, such as 401(k) and profit-sharing:

Only half of workers are employed by companies that offer a defined-contribution plan.

Only 2 in 3 eligible employees join. Of those who do participate, 7 in 10 are not

saving enough for a financially successful retirement (median balance is $58,000).

Observation

Financing retirement in the USA is fast becoming the sole responsibility of the employee.

Realities of Saving for Retirement

• Participation and deferral rates in USA retirement savings plans are inadequate.

• 7 in 10 are not prepared for retirement.• Workplace education and advice programs

have been less than successful.• Millions of employees say they cannot afford

to save for retirement.• Employees do not know what they don’t

know.• Employers and employees do not understand

the value of paying for good help — effective workplace financial programs.

A Major Reason for the Problem

30 million American workers— 1 in 4—report they are seriously financially distressed and dissatisfied with their personal finances.

National Norms for Financial

Well-Being on IFDFW Scale©

5.46.9

8.29.2

14.5 14.2 13.8

12.211.4

4.2

0.02.04.06.08.0

10.012.014.016.0

1 2 3 4 5 6 7 8 9 10

Percentage

(Mean=5.7; SD=2.4)

Source: InCharge Education Foundation, National Norms on InCharge Financial Distress/Well-Being Scale© for General Adult Population. 1 Means “Overwhelming Financial Distress/Worst Financial Well-Being”; 10 Means “No Financial Distress/Excellent Financial Well-Being” ©Copyright by InCharge Education Foundation and E. Thomas Garman, 2004-2007. All rights reserved.

(1-4: 30%) (5-6: 28%) (7-10: 42%)

(1-4: 30%) (5-6: 28%) (7-10: 42%)

National Norms: 30% Are Failing Financially

With Scores of 1-4

Big Point

“Financially unwell employees do not make the best decisions for themselves…

or their employers.”Passive

Anxious

Not Engaged

Confused

“Employees with money problems are like sharks

swimming around the workplace taking bites out of

the bottom line.”

What Does Poor Financial Literacy Cost?

Research says, “Every time someone on your work team brings his/her money worries to the job, workplace productivity drops”

Pay no attention to the elephant!

Can you recognize a financially stressed employee? No!

Employer Who RecognizesProblem, But Does Nothing

Research Proves ALL These Factorsare Correlated in the Ways Expected

Personal Finances:• Financial well-being• Financial

satisfaction• Financial distress• Financial stressor

events• Financial behaviors• Credit card debt• Credit card

delinquencies

Job Outcomes:• Work satisfaction• Pay satisfaction• Absenteeism• Presenteeism

(cutting down on normal activities)

• Personal financial matters interfering with work

• Work time used to handle personal finances

• Health

Big Point

“Employers do not realize they can improve profits

–and prove it–by providing employees easy

access to quality financial education programs to

improve personal financial behaviors”

Quality Workplace Financial Programs

Rescue Employees and Employers

One Who is Financially Literate…is Engaged in

Money Issues• Comparison shops• Achieves short, medium and long

term savings goals• Matches product

selections with savings goals

• Enjoys average to above average

financial well-being

AwareActive

Confident

Motivated

Better Financial Behaviors Result in Desirable Work

Outcomes• Less work time dealing with money matters• Fewer wage garnishments• Less absenteeism and short-term disability• Reduced turnover• Fewer workers’ compensation claims• Increased engagement with job• Better job performance/productivity ratings• Reduced health care demand• Reduced Social Security taxes on 125 plans• Fewer accidents• Reduced legal liability on 401(k) plan

Estimated Annual Costs of Ignoring Financial

Illiteracy ©1. Lost productivity $450a

2. Health care costs (poor health) 300b

Subtotal = $7503. Health care reimbursement (FICA) 92c

4. Dependent care reimburse (FICA) 382d

5. Traditional health plan choice 800e

6. TOTAL $2,000+

© Personal Finance Employee Education Foundation, Inc. 2007.

“Employer cost for no action is $750 to $2,000+ per employee!”

Personal Finance Employee Education

Foundation“Helps top management—one at a time—use company data to understand the bottom- line wisdom of workplace financial programs.”

Both Gain…When Employers Provide Employees With

Quality Financial Programs

So, Prove It

•Prove the financial program works.

•Prove the employer’s return on investment (ROI).

Benefits of financial programs become evident when the employer benchmarks the levels of employee financial well-being before and after implementing a financial program.

Employee Employer

Benchmark Employee Personal Financial Well-Being

1. Survey employees using the Personal Financial Well-Being (PFW) scale.

2. PFW is 8-item questionnaire that measures financial distress and financial well-being.

3. PFW is a valid and reliable measure.

4. Usage of PFW is free with permission.

How to Benchmark and Project the Employer’s ROI1. Survey Personal Financial Well-Being (PFW) of employees, and

array scores into 5 groups (20% in each).2. Compare group mean scores of highest 20% with lowest 20%

on last year’s job outcomes. What are the differences?3. Assign cost values to each job outcome.4. Conservatively estimate projected impacts of financial program

on job outcomes.5. Add up projected savings.6. Add up projected financial program costs.7. Calculate projected ROI.

ABC Company Projected 1-Year Changes

1. Projected 1-year changes in work outcomes:– 12% will improve job performance rating– 16% fewer garnishments– 16% will have reduced absenteeism– 5% less turnover compared to average– 10% will spend less work-time spent on personal

finances– 8% less short-term disability– 9% lower health care costs– 21% will contribute to 125-plans– 5% fewer accidents/workplace violence– 5% fewer thefts– 10% fewer workers’ compensation claims– 14% increase in contributors to 401(k) plan

2. Next assign costs to each factor and estimate increases in work outcomes.

Summary of Projected 2.8 ROI

for ABC Company*1. Program offered to 28,000 employees

2. Program impacts 30% of employees, 8,400, in

varying degrees of effectiveness resulting in

improved financial behaviors and job outcomes for

some

3. Total value of projected improved job outcomes

$4,499,000

4. Projected cost of financial program = $1,600,000

5. Projected ROI 2.8/1 ($4,499,000/$1,600,000)*These calculations are reasonable estimates, not guarantees. Some numbers are very low estimates and ABC Company’s Human Resources Department has the most accurate cost data. Decreases in accidents, workplace violence, and theft, and reduced fiduciary liability are additional ROI values, and they are not part of this ROI calculation, although they should be included.

Mount Quality Financial Program

Deliver to all employees and focus on impacting those with low financial well-being.

Emphasize the basics of personal finance:

Money Management Credit Management Spending and Saving

How to Calculate the Real ROI

(One Year Later)1. Review changes in job outcomes.2. Add up the savings.3. Add up financial program costs.4. Calculate real ROI.

Key Messages1. 30% of USA employees are dissatisfied with

their personal financial situations (scores of 1-4 that are less than middle [5-6]).

(What’s the percentage at your workplace?)

2. Employer uses PFW to survey employee financial well-being to establish baseline information.

3. Checks company data to project return on investment for improving employee financial well-being.

4. Hires the best provider to improve employees’ financial decision making.

5. Surveys PFW one year later to prove the real bottom-line results.

Conclusions on Retirement and Poor Personal Finances1. Financially illiterate adults do notmanage their personal finances

very well and they do not saveand invest enough for a

financially successful retirement.2. It is in the employer’s best

interest—more profits—to provideemployees easy access toquality financial programs.

In Closing

• I leave you with the immortal words of the great baseball player, Yogi Berra, of the New York Yankees, who often fractured the English language with his truisms like:

•“If you don’t know where you are going, you will end up somewhere else.”

Thanks!

Information/FootnotesDr. E. Thomas Garman

Professor Emeritus and Fellow, Virginia Tech UniversityPresident, Personal Finance Employee Education Foundation9402 SE 174th Loop, Summerfield, FL 34491 USATele/Fax: 352-347-1345E-mail: ethomasgarman@yahoo.comWeb: www.personalfinancefoundation.org

To examine the PFW scale and read research articles about its use, see http://www.afcpe.org/pages/journal_abstract.cfm?journal_id=290&top_id=21 http://www.afcpe.org/pages/journal_abstract.cfm?journal_id=303&top_id=21

For permission to use the PFW scale, contact Dr. GarmanFootnotes:

a Based on reduced absenteeism and less work time dealing with personal financial concerns. See research and press releases at www.PersonalFinanceFoundation.org

b Conservative estimate; research underwayc $1,200 contribution to health reimbursement plan ($1,200 X 0.0765)d $5,000 contribution to dependent care reimbursement plan ($5,000 X

0.0765)e Employee stays in high-cost health plan instead of choosing less

expensive CDHC policy (consumer driven health care)

Appendix: Detail on Projected 2.8 ROIfor ABC Company*

1. Program offered to 28,000 employees2. Program impacts 30% of employees, 8,400, in varying degrees of

effectiveness resulting in improved financial behaviors and job outcomes:a. Garnishments (2,484 X 0.30 = 745 X $600) $ 447,000b. Absenteeism (56,000 X 0.30 X 0.10 = 1,680 X $100) 168,000c. Short-term disability (1,259 X 0.30 X $100) 37,000d. Turnover (28,000 X 0.0025% = 140 X $6,000) 840,000e. Health care costs (28,000 X 0.30 X 0.10 = 840 X $400) 336,000f. Workers’ compensation claims ($32M X 0.005) 1,600,000g. Health care spending plan (1,353 X 1 X $1,000 X 0.0765) 10,000

(cash)h. Dependent care spending plan (259 X 1 X 1,000 X 0.0765) 19,000

(cash) i. Job performance rating (28,000 X 0.30 X 0.05 = 420 X $2,100) 882,000j. Work-time on finances (28,000 X 0.30 X 0.05 = 420 X $167) 70,000

3. Total value of projected improved job outcomes $4,409,0004. Cost of financial program = $1,600,0005. ROI 2.8/1 ($4,409,000/$1,600,000)

*These calculations are reasonable estimates, not guarantees. Some numbers are very low estimates and ABC Company’s Human Resources Department has the most accurate data. Additional ROI values from decreases in accidents, workplace violence, and theft, and reduced fiduciary liability are not included in this ROI calculation.