Why Financial Education At Work Fails–And How It Can Succeed
By Dan Kadlec
January 24, 2018
Financial education in the workplace has basically failed on every front, a new report asserts. Yet giving up is not an option—and the author urges employers to double down on their efforts via more expensive programs such as those that include one-on-one coaching.
Why would employers spend more on these programs? Financial stress among workers is reaching crisis levels. Yes, wages have begun to rise. But 75% of the workforce lives paycheck to paycheck. Savings rates are at a 10-year low and total household debt of $12.8 trillion recently eclipsed levels last seen before the 2008 meltdown.
Workers bring these stress points to the office and it makes them less productive. Financial stress leads to absenteeism and health issues that affect how well people do their jobs. This is why employers got interested in financial education in the first place. Now, they must refocus on methods that have the most promise.
Businesses have traveled a long road to this point, notes the report’s author, Martha Brown Menard, a researcher for Questis, a financial planning research and advocacy firm. Workplace financial education has been on the radar at least since the days of President John Adams, who said, “All the perplexities, confusion, and distress in America arise not from defects in their Constitution or Confederation, nor from want or honor or virtue, so much as the downright ignorance of the nature of coin, credit, and circulation.”
Through the decades other leaders have lamented individual money ineptness on a global level. In 1849, the London banker James Gilbart promoted financial education as a way to help individuals feel comfortable so that they might be more inclined to open an account.
Financial education evolved slowly for 200 years. The switch to 401(k) savings plans ignited employer interest in the subject as they introduced the new savings vehicles. The 2008 financial crisis made workplace financial education a global concern. But little seems to have worked. An examination of 90 studies shows that financial education accounts for just .1% of financial behavior change, Menard found.
One conclusion is that these programs tend to be instructive in a textbook kind of way but do not take real-world concerns into consideration. It’s one thing to be shown that compound returns lead to significantly more savings over 40 years; it is quite another to convince individuals to make a long-term savings commitment when they are generally unaware of how much they will need to retire.
To help workers make the leap, some companies have begun embracing financial wellness programs that consider all of an individual’s finances and offer personalized advice. Retirement planning firm Voya Financial just introduced an online program that gathers employee financial information and, via a short video, spits out useful analysis.
The Voya program is digital; it does not provide one-on-one consultation, which the Questis report finds is most useful. Still, the videos are easy to digest and researchers have found that four times as many people would rather watch video than read about a financial product. In the videos, individuals learn how much monthly income they need to retire with the same lifestyle, and they see their current track for monthly income and how to change it.
Top 5 Money Misbehavior Issues
Such programs adhere to the latest thinking in workplace financial education, which is…
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…that addressing behavioral issues is more important than providing pure financial knowledge. The Questis report highlights five behavioral issues that lead to money mismanagement:
Discounting the future People tend to give more importance to needs and wants they have today than those they will have in the future. The present is concrete; the future is abstract, making those needs much easier to put off. Discounting the future can lead to overspending and taking on too much debt, or not saving enough for retirement.
Overconfidence People tend to downplay possible negative events, figuring things will just work out. That leads them to, say, ramp up stock purchases at record high prices, ignoring the likelihood of a pullback—or forego insurance, thinking they will never need it.
Anchoring People tend to use the first piece of information they encounter as a baseline for comparison. At a restaurant, they see a filet mignon for $53. Suddenly the $31 ribeye seems like a bargain. It’s not.
Confirmation People tend to give more weight to information or opinion that confirms what they already believe, and to ignore evidence to the contrary. This bias leads them to stay with what they know and not try things that may offer greater value. It also leads them to value their possessions more highly than a stranger would.
Loss Aversion People tend to feel more regret over a loss than pleasure at a gain. This leads them to shun appropriate risks, such as owning stocks, that might cause short-term losses but lead to long-term gains. Marketers capitalize on this propensity often—offering no-cost trial periods so that consumers will sign up later in order to not “lose” something.
“Simply being aware of cognitive biases doesn’t always translate into immunity from them,” Menard writes. “They are rooted in our most basic emotions and instincts, which is why they are so difficult to overcome.”
Next Up: Financial Coaching
These biases help explain why financial education alone usually is not enough to change behavior. Individuals need timely interventions that engage and encourage them. Personal financial coaching appears to be the most effective approach, Questis found.
Financial coaching is a relatively new approach. It differs from financial advising in that a coach lets client-centered goals guide the process, rather than dictate expert advice. The idea is to work with an individual to identify desired behavioral outcomes, set goals, brainstorm strategies, create action plans, identify strengths and motivate. Coaching is at the heart of the five principles of financial education recently identified by the Consumer Financial Protection Bureau.
In various studies, financial coaching bolstered confidence, goal-setting and saving. It cut into the delinquency rate among mortgage holders, reduced debt, minimized stress and raised credit scores. These are inarguably wonderful outcomes that textbook financial education has been slow to produce.
This does not mean we should ditch classic financial education, especially in schools. An early grounding in things like compound growth, inflation and bank fees makes financial coaching easier to understand later on. Employers can build on that base through a financial wellness program that is highly personalized.
The best programs include one-on-on interaction with an expert and address specific measureable goals like paying down debt or saving more. They make use of employee-selected nudges like text messages or email notices that encourage certain actions. They also employ relatable real-world data, such as how much monthly income an individual is on track to receive in retirement as opposed to rough estimates of how much that person needs to save and invest.