The Path Forward

Combatting Financial Insecurity

How 2020 exposed an instability within today’s workforce… and revealed a roadmap to our recovery

by Marion Mathes

Ms. Mathes is the founder and Chief Executive Officer of CreditWorks, a consumer financial benefit company based in Miami, FL.

A common assumption today is that salaried employees are generally financially secure. They have a job, likely a 401(k) plan that they contribute to, a budget for maintaining their finances, and more. However, what many people fail to realize is that a lack of savings for unexpected expenses is the primary cause of financial insecurity today. In 2019, 69% of Americans had less than $1,000 in a savings account compared with 58% in 2018, and this is when the economy was stronger and employment numbers were higher. Without having that cushion set aside for surprise expenses like medical emergencies, and home and auto repairs, many become increasingly financially insecure.

As expected, in 2020 the financial insecurity of Americans has only been exacerbated by the Covid-19 pandemic. According to the Financial Health Network’s 2020 trends report, 67% or roughly 167 million people are not financially healthy. On top of this, around 78% of the population currently lives paycheck-to-paycheck. With today’s consumers increasingly stressed when it comes to their finances, the financial insecurity of the majority of our working population has wreaked havoc on employee productivity and engagement in today’s workplaces. Financial stress seeps into all aspects of physical and mental health. From worrying about how to make ends meet, to concerns about the future, financial stress can take a substantial toll on an employee and the American workforce at large.

Insecurity Seeps In…

According to a study conducted by EBRI and Greenwald Research on how financial insecurity impacts an employer’s workplace and financials, employee financial insecurity can lead to high turnover rates, employee absenteeism and delayed retirement. Financially insecure employees are more likely to not finish daily tasks, look for a new job and have troubled relationships with co-workers. These financial troubles seep into their mental and physical well-being as well, including through muscle tension or back pain, headaches or migraines, insomnia or sleep trouble, high blood pressure, severe anxiety, stomach ulcers, severe depression and heart attacks.

For many, short-term financial pressures also take priority over retirement savings. Today, we see millions of working Americans with access to 401(k) plans, yet only 41% participate. Unfortunately, many feel that they lack the income to take part due to household budget restraints. In addition, an increasing number of workers are using retirement savings for short-term liquidity issues. According to a survey of 770 HR executives by The Financial Health Network in partnership with Morgan Stanley at Work, 46% of employers reported an increase in requests for 401(k) loans and hardship withdrawals since the start of the pandemic. When thinking about long-term financial goals and retirement, this is never a good idea. The financial security of our society depends on the ability of retirees to support themselves.

401(k) Hardship Withdrawals

The increase in hardship withdrawals from 401(k) plans is troubling, and the increase is cause for concern for the future of our workforce. While there are a few published studies on 401(k) default rates, data from the National Bureau of Economic Research indicates that 86% of those who have 401(k) loans outstanding when they leave their jobs default, and 10% of those who have 401(k) loans default while still employed. These statistics may sound shocking, however, when thinking about the lack of tools available to the majority of the working population, it is ultimately not too surprising. By taking out a 401(k) loan, employees are saving less for retirement, missing out on the employer match for those lost savings, and increasing their probability of defaulting, resulting in increased costs and tax penalties.

When thinking about nationwide financial insecurity, many expect the government to play a substantial role, like the Consumer Finance Protection Bureau. While most Americans hope that the CFPB will be more aggressive with protecting citizens in the financial marketplace, we cannot expect this more active enforcement of regulatory requirements to solve our situation. The CFPB can step in to shield consumers from the worst of predatory lenders, or empower them to make financially sound decisions, but the financial insecurity of our workforce is a more deeply rooted problem. To promote the conditions to augment financial security requires the combined participation of the public and private sectors. Should Congress come through with additional stimulus funds, we can expect workers to continue to make partial recoveries from the effects of Covid-19. While this is needed now, it is not enough to effect long-term change. We also need to promote sustainable solutions that support the financially fragile population.

Employers have an important role in providing resources to improve the financial health of employees and it is in the best interests of their employees, customers and shareholders to do so...

While some have been fortunate enough to be the recipients of government stimulus funds and have also taken steps of their own to protect their families during this period, nearly half have still had their financial health negatively impacted by Covid-19, with those in the most financially fragile condition having suffered the most. The majority of job losses have been experienced by people without college educations, and specifically women and people of color in this cohort due to the concentration of these workers in the industries hit the hardest. Not only have these workers been faced with dealing with the loss of jobs and reductions in wages, but for those who have not lost their jobs, economic pressures have forced many to discontinue contributions to retirement plans and other important benefits like health and life insurance. These dramatic changes have caused immense stress, both physically and mentally, for the American workforce.

Calling On The Private Sector

We must look to the private sector, and specifically to employers, to consider how employees can have access to the resources they need to become financially secure. It is in the best interest of employers to put their employees first, as a financially secure and engaged workforce results in better customer service, lower turnover and greater job satisfaction. This idea is becoming more widespread and adopted, with CEOs at major companies promoting the importance of financial wellness, like PayPal’s CEO Dan Schulman, who believes that having a financially secure and passionate workforce is the single biggest competitive advantage that a company can have.

It’s not a matter of how much money employers spend on financial benefit programs. In fact, many are unaware that they actually come at no cost to them. Instead, it is about putting in the effort to offer a new range of benefits that tend to the root of financial problems for employees. For example, salary advance programs do allow employees access to their earned wages earlier and at a lower cost than a payday loan, but these programs don’t promote financial security or wellness. They are merely a band-aid that allows workers to continue to live paycheck-to-paycheck. Employees need a mix of both educational resources to help them manage their personal finances and new tools like access to reasonably priced loans and tips on credit-building in order to take action and make the improvements that they’re taught.

While traditionally financial wellness has focused on retirement and insurance, there is an opportunity for employees to leverage short-term liquidity to receive help with their current needs and not just future needs. Short-term liquidity creates long-term stability, and these needs can be met through employer-sponsored programs that help employees pay off their student loans, create savings accounts, and receive access to affordable credit, to name a few.

From Fragility To Security

When one is financially fragile, work and family are affected, and people make different decisions than those who have financial security. To avoid employees making choices that set them back from achieving their financial goals, like requests for 401(k) loans and hardship withdrawals, leaders and specifically employers can help by expanding the components of their financial wellness programs.

We are encouraged by real examples of employers stepping up. UPS recently announced a new benefit offering a short-term savings plan, Prudential increased its financial wellness offerings as part of its standard voluntary benefit programs, and Just Capital teamed up with PayPal to establish a new initiative to make workers’ financial security and health a C-suite and investor priority. These are just a few examples of employers starting to recognize the need for multi-faceted financial wellness programs, and we expect this recognition amongst employers to increase as we head into 2021.

The economic effects of the pandemic have helped to magnify the financial insecurity of the majority of the working population, and once identified, these issues can be more readily addressed. Employers have an important role in providing resources to improve the financial health of employees and it is in the best interests of their employees, customers and shareholders to do so. Mental and physical health are directly correlated to financial stability, and together we can change our current structure to promote financial inclusion and security for all.