The simplified definition of financial literacy is understanding the topic of money. But what does this actually mean in an age when there are so many investment choices and economic challenges?
Ask a handful of retirement experts to define financial literacy and one explanation may differ slightly from another, but they all agree it contributes to overall financial wellness, and that it’s essential to building a robust safety net. But most Americans are far behind on their journey to financial independence, and a lack of understanding is negatively impacting their financial decisions.
According to new information from retirement platform Guideline, a staggering number of people overestimate their financial literacy, highlighting an urgent need for more financial education and benefits from employers. For example, 63% of respondents said they knew the difference between a Roth and traditional IRA, yet just 49% actually gave the correct answer.
Financial literacy education can help fill these knowledge gaps, but those learnings need to start from square one, says Jeff Rosenberger, Guideline’s COO. Having a basic understanding of emergency savings options, and then building benefits from there will help employees work toward those longer-term goals as quickly as possible.
“Typically the two long-term savings goals that people have are retirement and helping their children and grandchildren save for higher education,” Rosenberger says. “Get people into retirement savings earlier so they can compound their savings faster. They’ll end up in a much more secure place for retirement when the time comes.”
According to a 2022 Bank of America study, an overwhelming 97% of employers feel responsible for their employees’ financial wellness, so it’s more important than ever for organizations to equip their HR and management with the tools they need to have financial conversations with their workforce. For example, one of the current building blocks to financial security is emergency savings accounts, and employers who take the time to understand the savings options included with their benefits can highlight this in their recruitment and retention plans.
One of the most valuable and straightforward parts of any savings plan is an auto-enrollment feature. Built into many modern payroll platforms, employers have the ability to coach their employees on the various ways to make automatic contributions or, if they don’t feel equipped to do so, direct them to someone who can.
“We have a big emphasis on auto-enrollment as a way to engage and get people into their retirement plan sooner,” says Rosenberger. “There’s some very compelling data out there on the importance of auto-enrollment and different demographic groups, so we prioritize that.”
As more employers offer these accounts as a way to combat financial stress and help employees get a headstart on their savings options, even new legislation is providing some guidelines and support.
“There’s a seismic change happening right now which [related to] pension-linked emergency savings accounts,” says Rosenberger. “There’s a big section on that in the Secure 2.0 Act, and we think it’s a tremendous opportunity to help savers in the U.S. establish more emergency savings alongside 401(k) plans. We also think employers generally should pay for these benefits.”
The 401(k) remains one of the best options for retirement planning, yet according to the U.S. Census Bureau, fewer than 60% of eligible workers contribute to one. Furthermore, a little over 30% of American workers don’t have a 401(k) option through their workplace, which puts demographics like small business employees and the self-employed at a bigger disadvantage when it comes to retirement education and savings. It is a big problem, says Rosenberger, but there’s also a big opportunity to make positive changes.
Armed with the right knowledge, it is possible for every organization to lay out a well-paved financial path for its employees. Rosenberger recommends high quality payroll integrations and financial technology solutions with thoughtful design choices to create and maintain engagement and keep things organized for the employer.
“Not all payroll integrations are even,” Rosenberger says. “We started with an integration that we considered market-leading — that’s really important. It’s easier to engage and [customers] don’t feel like they need to cobble together to make the 401(k) work.”
Whether through emergency savings options or more traditional retirement plans, getting employees on board requires consistent engagement, along with auto-enrollment options built into your benefits, Rosenberger says.
“You need to get people into the system,” he says. “Get engaged, be saving money regularly, whether it’s for retirement or emergency savings or both. Trying to convince the typical worker they need to understand financial literacy up front seems misguided in the sense that you want to get them into the system to have some skin in the game. At that point you can meet them where they are with educational resources.”