Providing financial education to staff can indirectly impact performance, Annamaria Lusardi, professor of economics at Dartmouth College, tells Tom Washington
For many employees, making the right decisions when it comes to their personal finances, particularly in terms of savings and investments, is a tough task. This is often due to a lack of understanding that is symptomatic of the times. Poor financial capability has led to high levels of personal debt and left many people without sufficient retirement provision.
While responsibility for an employee’s financial situation ultimately lies with them as an individual, many employers are taking action to protect their staff from falling foul of uneducated decision-making, says Dr Annamaria Lusardi, professor of economics at Dartmouth College in the United States.
“The big thing the credit crisis has made clear is how little people really know, even in the financial industry,” says Lusardi. “In this confusion, there is a huge risk that people will take their savings away and not participate in the financial market. This is not going to help when it comes to retirement. There is a lack of trust at the moment so financial education is even more important.”
Implementing a financial education programme can be in employers’ best interests as the process enables employees to appreciate the full value of their perks, including their pension and the importance of saving for retirement. It also helps to ease any worries that employees may have about managing their finances which may, in turn, be affecting their productivity, says Lusardi. “[When it comes] to people who have been out of school for a long time, it seems the one place we can reach [them in] large groups is the workplace,” she explains. “Employees have to make difficult financial decisions and the workplace is potentially a good place to help them do that.”
Although employers will be keen to ensure that any financial education programme informs staff about the benefits package on offer, it should also cover broader issues. For example, Lusardi strongly believes that providing financial education for staff should not be limited to pensions or flexible benefits options. “Financial education must engage people properly with their finances so they do not make big mistakes,” she says. “[Even if] they are enrolled in a pension scheme, they might have made the wrong decision about their mortgage, for example. We have to think about it in a broad way.”
However, some organisations may shy away from offering financial education to staff due to fears over the cost of doing so and low employee take-up rates. But while providing access to financial education comes at a price, employers can optimise its effectiveness with careful planning and targeted communication. Lusardi explains that a one-size-fits-all approach to the subject is often ineffective as employees have differing savings needs and personal circumstances.
“One of the reasons seminars are not attended is because the content is not relevant,” she says. “There are many differences within the workforce that [employers] must consider, such as gender and age. Segmentation is vital.”
She adds that financial decisions can be difficult to make so employers must consider how they deliver information to staff and deploy it in as simple a form as possible.
“We need to recognise that people are not very numerate,” she says. “Insisting on giving a brochure full of numbers is not particularly helpful. We should rely on communication methods that people understand and can relate to, such as getting other employees to come in and talk about their experiences.”
Furthermore, important messages that are given in financial education seminars can be quickly forgotten if they are delivered in the wrong way. Lusardi says providing a step-by-step guide for employees to follow is one effective way of helping them follow through with their good intentions.
“In other kinds of self-help things, like diets, there is always a ‘seven-point guide to success’ and this is also needed in saving,” she says. “We need to give those steps so people know what to do. With employer-provided programmes this could be a powerful tool.”
While Lusardi recognises the budgets that have been available to benefits practitioners in the past may have contracted in the economic downturn, she insists that a half-hearted, cost-cutting approach will not be effective. “In economics we say there is no such thing as a free lunch,” she says. “You either want to do financial education or you do not. You have to spend some money and you cannot achieve financial education with nothing.”
But despite the cost of implementing a financial education programme, identifying the return on investment can be tricky. As saving and investment is fundamentally about making decisions about the future, measuring the success of a scheme can take time.
“When we do financial education we want to do one-to-one intensive courses and transform individuals into financial wizards,” says Lusardi. “[But] if you give me an hour of physics I am not going to run home and fix my car. Similarly, financial illiteracy is so widespread that it cannot be cured by just one hour of financial education.”
She adds that employers often fail to take this longer term view. “We have no patience – everyone wants short-term results,” she says. “No employer would be willing to finance a programme that is going to show a return 10 years from now, but at the same time we are getting too short-sighted. If people have not increased their savings within a year, we consider a programme to be ineffective.”
A variety of measures can be used to judge the success of a programme, she says. For example, increases in pension or share scheme take-up rates as well as contribution levels are areas where improvements may be seen. However, Lusardi says that, in some cases, these indicators may be misleading. For some employees, joining a pension scheme or increasing contributions may simply be inappropriate so it is vital that employers also recognise moderate changes in behaviour.
“For some people in certain situations it is optimal not to save,” she explains. “If we see them not saving we [may] say the programme is not working, but we have to measure not just in the short but also in the medium term. We are interested in changing behaviour but changes do not happen right away.”
On an individual level, a successful financial education programme is likely to trigger an increase in confidence among employees. Many workers would admit they know little about investment and are often uncomfortable making decisions around their finances. Lusardi believes offering staff guidance will lead to them taking more responsibility. “People have to make financial decisions and if education can improve confidence in this, that is a good start,” she says.
For large organisations, Lusardi believes one option is to introduce an in-house financial adviser. Just as some employers provide on-site gyms to enable employees to keep physically fit and keep healthcare costs down, so an adviser could be on hand to ensure staff remain financially fit.
“The advantage of having a financial adviser within the firm, hired by the organisation, is that it is a person who knows all the employees and [it] is a good way to build trust,” she says. “It would be expensive but [for] a big firm it might be one way to ensure financial education is successful.”
Overall, Lusardi claims the difficulty of achieving financial literacy among employees is often underestimated, adding that many think of it as a set of rules that anybody can learn.
“People are overconfident, especially men,” she says. “But [people] need a good grasp of finance before [they] can make the correct decisions. Mistakes can happen and people have finally realised that they are in charge of their own finances.”
Annamaria Lusardi is professor of economics at Dartmouth College and a research associate at the National Bureau of Economic Research, both in the United States.
During her career, Lusardi has also taught at Princeton University, the University of Chicago Public Policy School, and the University of Chicago Graduate School of Business.
She is currently a consultant to the US Treasury Department, designing a survey on the subject of financial capability as well as a financial literacy test.
She has also acted in a consultancy capacity for various organisations including US television channel PBS, the Dutch Central Bank and the Dartmouth Hitchcock Medical Centre.
Lusardi’s numerous publication credits include the forthcoming book Overcoming the saving slump: How to increase the effectiveness of financial education and saving programmes (University of Chicago Press), as well as papers such as Increasing the effectiveness of financial education in the workplace (May 2008) and articles such as 401(k) Pension plans and financial advice: Should companies follow IBM’s initiative? (Employee Benefit Plan Review, July 2007).
- A lack of information and lack of financial literacy provide fertile ground for financial errors. Left to their own devices, employees may choose to invest their pension wealth in either overly conservative or overly aggressive assets.
- Some studies have found that those who attend retirement seminars are much more likely to save and contribute to their pensions than those who do not. Those who attend seminars will not necessarily be a random group of workers. Because attendance is voluntary it is likely that those who attend have a proclivity to save.
- Widespread financial illiteracy cannot be cured by a one-off benefits fair or a single seminar on financial economics. This is not because financial education is ineffective but rather because these programmes are too small in comparison with the size of the problem they are seeking to address.