Every day we hear about financial wellness and financial wellness programs. And the attention is justified. As advisers, you are probably involved in some aspect of increasing people's sense of financial wellness, either individually or programmatically.
Although we in the defined contribution industry are focused on how workplace savings plans specifically add to peoples' financial peace of mind, it is a far broader topic. Ultimately, it is about helping people achieve the highest-order need — happiness.
Financial wellness clearly contributes to peoples' happiness. It is a critically important objective. When we listen to discussions surrounding financial wellness, one of the first things you hear is the word "stress." This is followed by a description of the detrimental effects of stress on mental and physical health and, eventually, work productivity.
This connection is real although hard to measure precisely. Our research has shown that the average worker spends hours at work each week dealing with finance-related issues. All in an effort to reduce stress. Unfortunately, it reduces worker productivity more than it reduces stress.
Let's examine the dynamics surrounding stress. The National Institutes of Health identifies three primary sources of stress: personal finances, workplace demands and personal relationships. Importantly, these sources are not sitting in silos; they interact with each other.
One of the key enemies of happiness and drivers of stress is uncertainty. This is often paired with its nasty cousin, lack of confidence (also called insecurity). In study after study, we see DC participants indicating they are highly uncertain (or unconfident about) their retirement preparedness. Importantly, uncertainty and lack of confidence are connected to one of the most powerful drivers of behavior — regret aversion.
People will do almost anything to avoid feeling regret. We see examples of it in our own lives, or our friend's lives, every day. "If only I had taken the opportunity when I had it…." or "What was I thinking when I…." Painful emotions to be sure. And financial wellness programs help them avoid regret. So why does participation in such programs often fall short of expectations? The answer, in part, is in the way financial wellness programs are presented to employees.
First, if the benefits of financial wellness programs are positioned prominently, as opposed to their features, people are far more likely to attend. For example, few people are attracted by a program promising training in estate planning. However, people are far more attracted to its benefit — ensuring (i.e., eliminating uncertainty) that generations of your loved ones are taken care of according to your wishes, not a probate judge's.
Second, we find that the people who would benefit most from a financial wellness program are the least likely to participate. Particularly in programs administered in a group setting of co-workers of all levels (as opposed to self-directed, on-line programs), people with the lowest perception of their financial literacy are the ones most likely to avoid these programs. This is driven by fear they will look unintelligent among a group they perceive as knowing much more.
Barriers to participation
The very term "financial wellness" can be a terrifying barrier to participation. In fact, research has shown that the perception of what you think you know about financial matters is a far greater driver of behavior than your actual financial literacy. The antidote is to build their confidence in their belonging in the program. "No previous financial training is required." Emphasize that the program is for everyone who wants to be more in control of the important aspects of their lives. A related condition for people to take any action is a belief that they can succeed. You can't necessarily promise they will succeed, just ensure the possibility.
Finally, the trust they have in you, their adviser, is the most critically important factor. If they don't trust the messenger's motives they are not going to listen. There are proven tactics to building trust: avoiding jargon, using peer-to-peer tone, reciprocity (i.e., explaining why you want them to get better), and reducing complexity of new topics, just to name a few. It is worth mentioning that the trust employees have in their employer can either amplify or neutralize your efforts to engage them. This is particularly true if they are asked to share personal financial or family information.
There is more to this complex topic, but these factors have the most impact. Your potential influence on employees' journeys toward improving their well-being and happiness is strong and clearly defined. Plan sponsors very often don't know the right steps to take to help their employees, although they sincerely want to do so. Stepping up in this capacity is perhaps one of the most important values you can add.
Warren Cormier is executive director of the Defined Contribution Institutional Investment Association's Retirement Research Center and the CEO of Boston Research Technologies.