Financial Education in the Workplace

One of the most important lessons the subprime mortgage
crisis holds for us is just how poorly informed many Americans are when it
comes to making important financial decisions. Clearly, there is a need for
basic financial education. But when, where, and how should such education be
delivered? Financial literacy programs aimed at high school students do not
appear to be effective, and few adults are willing to expend the time, money,
and effort to acquire the sort of general education that would help them make
good lifelong financial decisions.

This leads to the idea of delivering financial education in
the workplace, which appears to hold real promise for reaching large numbers of
adults in a cost-effective manner. Employers are theoretically capable of
providing the time, the place, and the instructors for trusted financial
education. But how many employers do so, and just how good is the education
they provide? What motivates some employers to provide such education,
particularly to low- and middle-income workers? This paper is a preliminary
status report on what is being done in this area, by whom, and with what
results.

Given the limited and often experimental nature of
workplace-based financial education, it seemed premature to conduct a
full-scale national survey of employers. Instead this overview is based on a
review of the current academic literature, a special Gallup-NFIB survey to
establish the incidence of such offerings by smaller firms, an analysis of
statewide surveys of employers in Pennsylvania
and Wisconsin,
and interviews with human resources directors in companies that offer such
benefits and third-party providers of financial education. We focused on the
small and medium-sized enterprises that are responsible for much of the job
creation in the United
States.

Initially, we intended to look at workplace financial
education that was not directly related to the provision of the employer’s
principal (primarily retirement) benefits. It was our belief that many
individuals are in need of financial education in subject areas unrelated to
employee benefits, such as how to finance a home purchase, choose investments
for a personal retirement portfolio, pay for their children’s education, and
manage debt, and that they should be thinking in terms of an overall lifetime
financial plan. However, relatively few employers offer financial education
that is not closely related to their company’s primary benefits; consequently,
we expanded the scope of this study to include workplace financial education
related to retirement.

Our research suggests that employers are primarily motivated
to offer financial education to comply with the fiduciary duty standards of the
Employee Retirement Income Security Act or to meet the federal
nondiscrimination test to qualify their pension plan for favorable treatment by
the IRS. But they appear to be motivated by other factors as well, including a
desire to help their workers avoid getting into financial difficulties (the
assumption being that a stressed worker is a less productive worker), the
belief that offering financial education helps them recruit and retain
employees, and out of a sense of social responsibility.

This overview looks at methods of delivering workplace
financial education, including print media, workshops and seminars, Internet
and intranet instructional programs, and counseling offered through employee
assistance plans. It also looks at the self-selection problem with optional
programs (higher-wage, financially savvy workers tend to welcome workplace
financial education, while lower-wage workers, who would benefit the most from
such education, generally do not), the use of incentives, the importance of
following educational sessions with a chance to act immediately on what has
been learned, worker-paid education, and interested versus disinterested
third-party providers of financial education.

Most employers appear to agree with the social need to
educate their workers, but in the current economic environment, they are
unwilling to expend the necessary resources. This is mainly because 1)
increased competition has squeezed profit margins, 2) other important benefits,
particularly health care, have become more expensive, taking a greater share of
the benefits pool, 3) employees do not seem to value financial education as
highly as they do other corporate benefits, and 4) providing objective,
effective financial education is expensive and hard for employers to justify on
a cost-benefit basis.

Since there are few other effective means of providing basic
financial education to American adults, we need to take another, pragmatic look
at workplace delivery. In order to promote workplace financial education, we
should consider 1) Helping companies pay for financial education programs, 2) initiating pilot programs, perhaps funded by philanthropic organizations,
focused primarily on lower-wage employees, who have the most to gain from such
education, and 3) leveraging the educational opportunities provided by
interested third parties willing to fully disclose their interests by
certifying those who are competent, ethical, and willing to deliver financial
education to all employees on a nondiscriminatory basis.