Michael Lewis’ The Undoing Project artfully documents how psychologists Daniel Kahneman and Amos Tversky applied their unique ability to create behavioral experiments that resulted in monumental breakthroughs in understanding why people act the way they do. This, of course, led to the new and game-changing discipline of behavioral finance.
So EBRI has been engaged in its own Undoing Project by applying its strengths over the past year — its ability to create databases and the unparalleled skill of its researchers in mining these databases — to an emerging and increasingly popular area of employee benefits: overall financial wellness.
This is important work. As we start 2019, the role of financial wellness as an employee benefit seems poised at a crucial juncture. According to EBRI’s 2018 Employer Financial Wellbeing Survey, 3 in 4 HR professionals expressed some level of interest in financial wellness programs for their employees, with top reasons given for offering such programs being improved overall worker satisfaction, reduced employee stress, and improved employee retention. At the same time, employers are baffled by how to navigate the myriad of initiatives available to them. According to same survey, employers struggle with the complexity of financial wellness programs, often citing the myriad of moving pieces that typically constitute them. They note they lack staff resources to coordinate and market the benefits, which in turn are often underutilized by employees. Employers also say they are challenged in making the business case for financial wellness initiatives and struggle to quantify the value added of the programs. In a focus group of employers conducted by EBRI last year, one employer summed up the latter challenge concisely, declaring that while he could spend millions of dollars on an employer matching contribution for the 401(k) plan, he couldn’t effectively make the case for a $10,000 investment in financial wellness initiatives.
The sheer number of providers — many of them startups — can be daunting. One vendor noted that he’d counted 300 firms with offerings they purported to meet the definition of financial wellness initiative. Indeed, the designation “financial wellness solution” ranges quite widely: in EBRI’s survey, it included student loan debt help, bank-at-work partnerships, debt management services, and financial counseling. What constitutes emergency fund assistance is a good example of how wide a net is being cast when it comes to classifying initiatives as falling under the label of financial wellness. In EBRI’s survey, emergency assistance included 401(k) and 403(b) hardship loans, natural disaster funds, and low-interest loans. The wide breadth of employee financial wellness providers leaves employers wondering how they should even characterize what they are trying to achieve.
Measurement is an important tool — both in terms of quantifying the need for financial wellness initiatives and their impact. Regarding the former, some leading-edge employers are doing a considerable amount of work in that area. In a focus group that EBRI conducted last year, one employer explained a rather sophisticated financial wellbeing score they had devised to quantify the bottom-line impact of financial stress. “High” financial stress was defined as an employee with a significant financial issue such as a hardship withdrawal in their 401(k) plan or a wage garnishment on file. Likewise, employees with multiple minor financial issues, such as not saving in or taking a loan from the 401(k) plan, were also placed in the “high” financial stress category. On the other end of the spectrum, “low” financial stress was assumed when there were no financial issues indicated in any of the data. The employer then parsed out claims data, absenteeism, and performance ratings of employees by financial stress level. At the end of the day, the employer was able to show that high financial stress among employees had a bottom-line impact in terms of these measures — thus justifying the resources and out-of-pocket expenses used to seek to improve financial wellbeing among employees. Still, according to EBRI’s survey, only 14 percent of employers are connecting the dots on financial wellness and its bottom-line impact by creating a financial wellbeing score or metric as described above.
Quantifying how financial wellness initiatives move the dial is arguably the flip side of the measurement coin. If an employer can show that financial stress is linked to higher employee turnover, for example, it can in turn seek to demonstrate how the financial wellness initiatives put in place reduce such turnover. According to EBRI’s survey, the most critical measure of success for employers’ financial wellness initiatives is improving overall worker satisfaction, followed by reduced employee financial stress. Going back to the employer in EBRI’s focus group that developed a financial wellbeing metric, key measures of financial stress came right from 401(k) data: hardship withdrawals, loans, and plan participation. Clearly this type of data is far more accessible than credit scores, for example, and it arguably can provide an indicator of overall financial health. Like the canary in the coal mine, the presence of poor retirement savings behaviors can signal that something is amiss with an employee’s overall financial picture. At a minimum, they may point to a low level of financial skill.
This is where EBRI’s Undoing Project comes in. EBRI is fortunate in having decades of experience in developing and mining retirement and health benefits data. Leveraging this experience, in 2018, EBRI undertook its initial steps in creating a financial wellness database that it will mine to help employers, policymakers, and the industry better understand how financial wellness initiatives move the dial on employee financial wellbeing. We’ll ask questions such as whether interventions around student loan debt, emergency savings, and overall financial counseling, for example, change 401(k) behaviors. Over time, our goal will be to demonstrate links to overall wellbeing by tying in claims data as well.
Like the financial wellness industry itself, EBRI is broadly defining the types of initiatives that fit into its database with a view to being as comprehensive as possible. And, consistent with our mission, EBRI’s analysis will be objective and unbiased — our sole consideration will be to provide an assessment of how financial wellness initiatives are moving the dial on employee financial wellbeing.
We at EBRI are excited about our journey and ask others to join us. EBRI’s Financial Wellbeing Research Center consists of providers, plan sponsors, government agencies, and associations interested in better understanding the financial wellness landscape. For more information, email info@ebri.org.