Travis Freeman, RFG Advisor, "10 Reasons a Financial Wellness Program is More Important than a 401(k) Plan"
published: August, 01st 2017
10 Reasons A Financial Wellness Program is More Important than a 401(k) Plan
ll of our friends in the retirement plan business, you should know that I’m a very big fan of 401(k) plans. It’s one of the most important benefits an employer can offer to its employees. Don’t worry 403(b) and 457, I’m a fan of yours too. When we talk about why a workplace financial wellness program is more important than a group retirement plan, we’re really talking about why it can be more impactful to an employee’s overall financial goals. The 401(k) plan is my favorite retirement savings vehicles. However, it’s not the only way to save for retirement. When an employee is faced with complex challenges or events, such as death, divorce, debt, college, benefits decisions, insurance planning, aging parents, estate planning and more, a financial wellness program can help them navigate these challenges and regain focus on long-term goals such as retirement. When we say a financial wellness program can be more impactful to an employee than a 401(k) plan, we’re talking about a comprehensive program that includes the 401(k) and gives employees confidence in their financial decisions – from the new hire out of school to the CEO dealing with complex issues.
They will morph into the “umbrella” that helps
to communicate and coordinate all employee
Below are 10 reasons that reinforce our belief. Over the next 10 years, workplace financial wellness programs will become a staple in an employer’s benefits package. They will morph into the “umbrella” that helps to communicate and coordinate all employee benefits plans, while also helping employees understand how to synchronize these benefits inside of work with their long-term goals outside of work. Congratulations to those employers that are already leading the pack with this strategy today.
- Financial wellness programs, if done properly, can help employees create a short-term and long-term financial plan. The short-term plan may include figuring out how to pay for a child’s college, paying down debts in an efficient manner or preparing for income needs in retirement. Just as NASA would never launch a space mission without a plan in place, employees need a plan in place for their multiple (and often complex) financial goals. Naturally, this financial plan includes how to use the 401(k) to support some of these goals.
- Highly compensated employees can run into compliance testing issues with their 401(k) contributions if the “general employee base” isn’t contributing enough (per Dept. of Labor and IRS rules). A financial wellness program may help increase average deferral rates among employees, thus supporting compliance testing for the highly-compensated. How can such a program help employees increase 401(k) deferrals, you ask? By using social psychology and helping employees understand that they may miss out on the long-term goals in their financial plan if they don’t save more to the retirement plan, behaviors change. We find this is much more impactful than showing the notorious “if you save $100 per month from age 22, here’s what you would have” chart. This strategy, combined with addressing external financial barriers to increased retirement savings, is how a financial wellness program can work towards this goal.
- Health Savings Accounts (HSAs) are becoming more important to an employee’s long-term financial goals. For example, if an employee is expected to have between $100,000 and $200,000 of out-of-pocket medical expenses after they retire, that money has to come from somewhere. If it comes from their 401(k) plan, it may be taxed at Federal and state rates (where applicable). However, if they saved to a HSA plan during their working years, they may be able to use HSA dollars tax-free if used for qualified medical expenses. By current law, that also includes Medicare premiums. Think about this for a second – if you expect to have six figures worth of medical expenses after you retire, do you want to use taxable dollars or tax-free dollars? A financial wellness program that includes benefits education can help employees understand how to unlock the potential of both the HSA and 401(k).
- On the topic of workplace benefits, whether an employer offers a 401(k), FSA, HSA, EAP, voluntary insurance or any other benefit, a financial wellness program that includes benefits education can potentially help increase utilization across the board. Aside from just education about benefits, the program may also help employees with what we call “benefits coordination.” If an employee has a “buffet” of benefits from which to pick, how do they use them all wisely as part of their long-term plan? If they are married, how do they coordinate their benefits with their spouses benefits to avoid wasting money or missing an opportunity? This is one of the reasons financial wellness programs continue to grow in popularity.
- If an employee has over-extended himself financially, even a hefty employer 401(k) match may not be enough to entice him to save more for retirement. Someone that promises to pay for college for their oldest child may end up regretting it by the time their second child is college-age. Parental student loans, or any type of debt for that matter, may siphon off a large part of the monthly budget to the point an employee can’t afford to save more towards retirement. A financial wellness program may help employees address these obligations so that more income is available each month to save toward retirement.
- We find that many families buy too much house relative to their budgets. If a monthly mortgage payment takes up 25-30% or more of someone’s income, you can see why more retirement savings may be a challenge. Some banks allow borrowers to acquire a mortgage that consumes up to 40% of their income! A financial wellness program can help to calculate how much house a family can afford without “stealing” from other goals, such a retirement. With 20 and 30 year mortgages being as popular as they are in the US, right-sizing a home purchase is an extremely important part of a financial plan.
- Some 401(k) plans include access to speak with a financial advisor. Among those that do, not all are independent. For those that do allow access to an independent advisor, they may not be trained on the financial planning process (as taught by the CFP® Board of Standards). Just as a dentist and an orthodontist both specialize in oral care, they do very different things for patients. Can a financial advisor that specializes in helping businesses with a 401(k) plan also handle complex financial planning needs for employees? It’s possible, but you can’t specialize in every field. Would you let your orthodontist perform a root canal? A financial wellness program that is 100% independent and provides access to technology and financial planner professionals may be more appropriate. The financial wellness program allows the 401(k) advisor to do what she specializes in – helping the employer and performing the duties of a retirement plan professional.
- If you played sports as a child, you may remember having a coach. Even if you were in band, you remember having a bandleader. A coach, by nature, is someone that helps us stay accountable to our goals to picks us up when we lose sight of those goals. As a provider of financial wellness programs, we work with many law firms around the country. Can you guess how many attorneys don’t even have a basic will? Based on our experiences with these firms, it’s close to 50%. We’ve even found estate attorneys that don’t have wills or trusts. When we ask these attorneys if they have estate documents and they blushingly tell us “no,” we hear the same justification every time – “I’ve been so busy.” It doesn’t matter how intelligent you are, where you went to college, or how much you earn. We can all lose sight of important financial goals. That’s when a coach helps to motivate us and make these goals a priority. Using technology and independent financial planners, coaching is a natural part of a financial wellness program.
- A financial wellness program can help decrease financial stress for employees. Whether someone is dealing with a divorce or they’re faced with an expensive medical issue, money can be a stressful topic. It can even take a toll on your health. When stressful events happen that can alter an employee’s financial goals, a quick call to the financial wellness program may help that employee refocus their efforts on how to address the issue at hand and continue focusing on the long-term goal.
- Financial wellness programs often include family members such as a spouse without an additional cost. For example, when an employee wants to create a plan for long-term goals, the inclusion of their spouse usually a good idea. When the topic is college planning, the conversation may include the employee, a spouse and the soon-to-be college student.
A good financial wellness program is easy to
implement and supports your other
employee benefits – including the 401(k).
If your organization isn’t providing a comprehensive financial wellness program for employees today, it’s not too late to start one. A good financial wellness program is easy to implement and supports your other employee benefits – including the 401(k). Whether you consider a financial wellness program to be part of your overall wellness initiative, an extra perk for employees or the umbrella over your total benefits package, it may plan a growing role for your organization in the years ahead.
Travis Freeman, CFP®
Author, CERTIFIED FINANCIAL PLANNER™
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This article is not meant to be construed as tax or legal advice. Please speak with your independent financial planner professional, tax advisor or attorney before making any changes to your investments, tax and/or legal situations. No strategy assures success or protects against loss. Four Seasons Financial Education (FSFE). Financial wellness and consulting services provided through RFG Advisory Group, LLC, a SEC Registered Investment Adviser.