Impact of Poor Financial Wellness onYour 401(k) Plan

Impact-of-Poor-Financial-Wellness-onYour-401(k)-PlanGoogle “financial stress and health” and about 10,100,000 results are returned in 0.33 seconds; there are articles that detail how to recognize it, how to cope with it, and how to avoid it altogether. Despite all of these helpful tips, there are still a large number of working Americans faced with the ill effects of financial stress.  In the 2016 PricewaterhouseCooper’s Employee Financial Wellness Survey, it is reported that 52% of employees are stressed about their finances and that the stress impacts their health, relationships at home, productivity and attendance at work. Additionally, this financial stress can be a factor in whether or not your workforce is actively deferring into the 401(k) plan. As we know, low deferrals and low participation can be 401(k) plan killers.

A Downward Spiral

401(k) plans are set up to benefit the general population of employees and annual compliance testing (ADP/ACP) is designed to capture whether or not the plan is doing just that.  In short, there is a set amount, captured in a percentage, that the highly compensated employee (HCE) group, defined as an owner or someone who made over $120,000 in 2015, can defer over and above what the non highly compensated employee (NHCE) group defers. As in any mathematical average calculation, a zero drags down the average.  Now that I have given you the background, let’s look at why this is important.  If you have a financially stressed workforce who is not deferring into the plan, then there is a good chance that your HCE group cannot fully take advantage of it.  What we have seen happen in this situation is that the C-level executives who typically make up the HCE plan become disillusioned and stop promoting it.  Then without managerial support for the plan, the NHCE group typically comprised of rank-and-file workforce loses interest too.  Under that scenario, deferral percentages and participation are dragged even lower.  Soon the plan finds itself in a nasty downward spiral of lower and lower participation and deferral percentages which then leads to more financial stress for your people preparing for retirement. You can see where I’m going with this.

Plug the Leak

Another troubling statistic that is being driven by poor financial wellness is plan leakage.  Plan leakage is money that comes out of the plan prior to retirement either through loans or hardship withdrawals.  The 2016 PricewaterhouseCoopers Employee Financial Wellness Survey pointed out that almost 25% of all employees have already taken money out of their retirement accounts and 43% think that they likely will need money from their retirement accounts to pay non-retirement related expenses in the next year. While 401(k) loans may seem attractive because “you are paying yourself back”, what many participants fail to realize is that the money they withdraw as a loan is out of their account and therefore out of the market.  This means the amount of money taken out for the loan will not benefit from the potential gains in the market while is it out of the account.  Additionally, there are fines and taxes associated with defaulting on a loan which can occur if the participant leaves your company before the loan is paid off in full.

What Can You Do?

There are many ways to tackle the problem of low deferrals and low participation; including changing your 401(k) plan design to include a richer match formula to incentivize employees to act, lowering eligibility requirements to allow people to enter the plan sooner, or adding an automatic enrollment feature. These solutions address the end result, not the cause of the problem.  In order to truly improve the financial wellness of your valued people, we believe you have to address the root causes – lack of budgeting, lack of confidence, and lack of urgency.  To address these broader financial topics, employee education needs to not only address the hows of participating in the 401(k) plan, but the whys as well.  For some great ideas on addressing employee education needs, check out Caleb Bagwell’s blog at: Motivated Monday

Although the idea of fostering financial wellness at your company level may seem daunting, this is a great opportunity for you to build more loyal and productive people by addressing their financial needs.  As reported in the 14th Annual U.S. Employee Benefit Trends Study conducted by MetLife, 71%of employees consider work to be the foundation of their financial safety net.  Additionally, 62% of employees agree that they are relying on workplace benefits to help them achieve financial security. Even more telling, 50% of employees strongly agree that their benefits at work help them worry less about unexpected health and financial issues.  As a plan sponsor, you have an amazing ability to positively impact the lives of the people who you value as employees.  Let us help you design an employee benefits plan that can help address financial stress and build a stronger relationship with your workforce.

calebCaleb Bagwell/Employee Education Specialist
John Maxwell Certified Leadership Coach
Grinkmeyer Leonard Financial
Toll-Free: 866.695.5162 / Office: 205.970.9088 
1950 Stonegate Drive / Suite 275 / Birmingham, AL 35242
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Securities and advisory services offered through Commonwealth Financial Network, Member www.FINRA.org/www.SIPC.org, a Registered Investment Adviser.  This communication strictly intended for individuals residing in the states of AL, FL, GA, KY, LA, MD, MS, OK, PA, SC, TN, TX. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

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