As companies act to attract and retain good employees, many are choosing to offer financial planning as one of the perks of employment. But in the words of Albert Einstein and Alexander Pope, a little knowledge can be a dangerous thing.
It can lead to adverse consequences for both well-intentioned employers and financial do-it-yourselfers that use financial planning software without a certain amount of knowledge or the inability to see the bigger financial picture.
As benefits programs become more self-directed, individual workers becomes empowered and entrusted with the responsibility for making critical financial decisions that affect themselves and their families. But where is the financial knowledge coming from that should underpin such decisions?
In a study released by the Federal Reserve Board in 2009, 59% of families where the head of household was age 55 to 64 used the Internet to access financial information or financial services.
The percentages were even higher for younger households. And although the Internet has put powerful planning tools and financial calculators into easy reach for consumers, some argue that this is as dangerous as do-it-yourself surgery.
Such a caveat, however, isn’t meant to steer employers or employees away from leveraging this kind of technology. Rather, it reinforces the importance of the employer’s role in making sure financial planning software — and how to use it — is part of the overall complement of financial planning services offered and not a solution in and of itself.
Pros and cons
To begin with, financial planning tools and calculators are easily accessible. Some can be accessed or downloaded straight from the Internet.
Others are offered by financial planning providers or benefits administrators, sold as part of a package or given away as enticements. Most provide immediate results. All these are factors that make such tools particularly appealing to the do-it-yourselfers.
On the flip side, financial calculators are prime examples of the value of the outcome being directly proportional to the quality of the input.
If they don’t include parameters that prohibit the user from inputting unreasonable assumptions, such unknown factors as healthcare costs, the impact of inflation or last minute changes in tax regulations may be left out of the fundamental equation and thus give inaccurate or inadequate results. Simply put: garbage in, garbage out.
Financial software alone probably can’t answer a user’s specific question and is more likely to provide a narrow perspective or address a single topic rather than look at the individual’s overall financial profile.
For example, in the case of a retirement planning calculator, the tool may provide results telling the user to increase 401(k) contributions by 10%, but not recognize the subsequent impact on cash flow or the ability to accomplish other goals.
Users working with more than one calculator may see different, even conflicting results from one tool to another. And no matter how comprehensive the tool, the individual is still the one left to implement the plan.
The employer’s role
If a company plans to offer any kind of financial education to employees, it’s important to remember that putting a program in place is just the beginning. When considering offering financial planning tools, technology and software to employees, employers must:
* Understand your motivation. The reasons employers decide to offer financial planning services can be as altruistic as a fundamental concern about their employees’ financial well-being or as pragmatic as the need to quiet the squeaky wheels among their workforce.
Most of the time, the decision involves a combination of “checking the box” that says financial planning services are available and “doing the right thing” to promote financial literacy.
Regardless of what may motivate your company, offering financial education, planning and technology to employees throughout the organization is a good thing.
How far you take that offering may be governed by motivation as well as by budget constraints and resource availability. Use caution though, as going only half way in assisting employees can be as risky as providing no help at all.
* Understand the audience. Make sure that the tools and services you offer are geared to the needs of your employee population, whether that means stock options and executive compensation, or debt management and budgeting.
* Factor in all costs. Regardless of the scope of services, your initial investment is just the beginning. Be sure to include the cost of maintenance as well as help desk or other support appropriate to your employee base. Some providers will include seminars or financial counseling as part of their package. Others will charge according to the extent of the service requested.
* Be forthright. Communicate the capabilities and the limitations of the financial planning package to your employees and other end-users.
Make sure that you do not foster unrealistic expectations about the performance potential no matter how appealing the hype may be. Doing so will set both management and employees up for failure, unnecessary risk and liability.
* Provide support. To make sure the software is being used correctly and to its fullest capacity, provide employees with telephone access to objective financial planners. This can help them not only interpret results but also plan and take appropriate action.
* Know the risks — for your company and your employees. If you tell employees that you have a plan for helping them make the most out of retirement, but you don’t tell them how to do it, you’re at risk.
If you provide a tool that assumes a set return without clearly portraying the possibility that the employee may experience losses, you may be opening the company up to employee resentment, bad publicity and more.
* Communicate. Communicate about what you’re offering and how to take advantage of the programs. Communicate changes in policies, benefit plans and anything else that could affect the input to and outcome of the financial planning software. Communicate the value proposition.
The employee’s responsibility
Employees need to understand that they too have a role and a responsibility in getting the most out of the financial planning services that you may offer. Communicating that message upfront is important in positioning personnel and your company for the best possible outcome.
Equally important is understanding that getting the information is only the first step — and arguably the simplest. Next is knowing how to use the tool, recognizing its limitations, then turning the output into action.
This is the part that requires a commitment from the employee and his or her family and a shared dedication to putting the plan into practice and making it work on a daily basis.
That said, any support that employers and knowledgeable professionals can give to encourage, promote and help build personal financial stability is just good business. —E.B.N.
Lynn Pettus is involved in employee financial services at Ernst & Young LLP. The views expressed herein are those of the author and do not necessarily reflect the view of Ernst & Young LLP.
