New benefits help employees shed their debt weight
Just as health-related wellness has become the major focus of many benefit plans, employers are increasingly seeing the power of providing financial wellness assistance and education to their workers both in terms of productivity and as a retention tool.
And while programs including financial counseling, retirement savings strategy and general budgeting are becoming more and more popular, many companies are also looking to some very specialized voluntary offerings that provide direct financial wellness benefits to employees.
Among the hottest trends, benefits decision makers now have choices for low-cost lending and credit-establishment services, helping financially overtaxed workers to consolidate their household or even student loan debt and more efficiently develop real savings.
A flurry of startups decided to zero in on what they saw was as a market void, dealing with immediate issues of financial planning, rather than long-term objectives of retirement savings, where the vast majority of service providers target. Theyve also created alternatives to help steer employees away from the damaging practice of taking loans on their own fledgling 401(k) savings.
This is really fair, responsible lending and it also helps employees build up a credit history, says Pam Dimitro, controller of JNET Communications LLC, which provides a suite of customer management and fulfillment services to large companies.
About 900 of the companys 1,600 employees can access an online term loan program offered as a voluntary benefit by a company called Kashable. Nearly half of those who were eligible signed up right away in 2013. One HR manager at this holding company with two wholly owned subsidiaries called it probably the best benefit weve ever offered. Even JNETs PEO management company thought it was such a great idea that they decided to take on the administration.
Most employees, whose jobs mostly involve call-center services or cable TV installation, paid off their initial loan within six months and then took out another one. While they do not yet have a 401(k) plan, JNET employees may have that part of the financial wellness equation rounded out when the company considers adding the benefit possibly later this year.
Kashable sought to provide immediate access to affordable lending to roughly two-thirds of U.S. employees who dont qualify for prime credit. The companys 95% approval of all its group loan applications is extremely high compared to credit card companies or other lenders, explains Einat Steklov, who co-founded the company in 2013. Its a low-cost, socially responsible option that has an easy repayment feature with flexible credit thats available 24/7, she says.
As a more prudent alternative to tapping retirement savings and expensive credit card loans, Steklov says Kashables solution can help reduce financial worries and keep employees more productive. Indeed, nearly 80% of roughly 40,000 U.S. workers studied by the Financial Fitness Group report were found to be under moderate or high levels of financial stress, seriously impairing their ability to focus on the job.
This could help explain why as many as 76% of employers polled by Aon Hewitt were interested in financial wellness programs in 2013 and 93% committed the following year to create or expand their efforts in this area.
Data suggests that employees who borrow against their retirement funds invariably fail to pay back the loans when they eventually leave their organization, according to Adam Potter, co-founder and president of SimpleFi, another low-cost lending service founded in 2012. This can mean a 10% penalty and income tax payable on the amount not repaid, which can be a substantial amount of retirement savings he says.
Another point he raises is that employees who are under financial pressure, or during repayment to their retirement loan, stop contributing and lose the employer-match. Nearly 29% of Americans have borrowed from their retirement fund with the average amount at $9,000 through 2014, Potter notes.
His companys chief objective in launching its employer product in April 2015 was to relieve stress during financial emergencies by preventing employees from borrowing from 401(k) or 403(b) accounts, or resorting to expensive predatory loans. For those who are already in financial distress, one-on-one financial coaching and advocacy helps educate users of the service on how to get out of debt and build credit.
Were able to review all their finances, show them their credit report and look at their bank statements, which makes it much more customized and personal, Potter says.
Marcy Jacobs, director of HR and benefits at the Bay Areas Alameda County Community Food Bank, says offering the SimpleFi benefit drastically changed behavior patterns with her employees. She says she was astonished that after processing about 13 loans from a 403(b) plan during her first 10 months on the job, she hasnt processed a single loan since the SimpleFi option came along last November. About 20 of 79 employees who are eligible for the service have collectively borrowed $52,000, saving roughly $12,000 in interest.
Thats huge, Jacobs explains. Were a nonprofit, so things are pretty lean. We dont pay Google-style salaries. I think being able to offer an alternative to our team, some of whom are unbanked and dont have access to credit in the same way that maybe those in knowledge-based jobs do, has really made a huge difference.
Loan alternatives are also an important way to avoid 401(k) or 403(b) plan loans because of the double taxation, as well as high administration and maintenance fees for small loans that drive up the annual percentage rate, Steklov adds. In addition, she says the Department of Labor estimates that 401(k) defaults reach about $662 million a year, which translates to tax payments and penalties for not paying back the loan on time.
SimpleFis business model addresses the entire credit spectrum in partnership with other financial services, offering highly accessible credit at affordable rates starting at 0% APR. Low-cost refinancing loans allow employees to pay down debts faster than traditional solutions.
Potter recalls working with a female employee of the San Diego Zoo with about $24,000 in credit card debt who went from paying about 25% interest to an average of about 9% on longer terms, thanks to a deal worked out with her credit union. The zoo is among more than 20 organizations working with SimpleFi.
We love having these kinds of partners, he says, because unlike outside financial institutions, they are very motivated to help and are much more relaxed on their qualification criteria in order to maintain the account.
One area thats particularly ripe for low-cost lending is assistance in coping with the epidemic of student loan debt in America. Some workers take out a loan for each year of an undergraduate degree program, while others seek two or three loans a year, depending on their circumstances, reports Dan Macklin, co-founder and VP of business development at SoFi, a leader in marketplace lending with more than $2 billion in loans, half of which came just within the past six months. They can easily add up, particularly if graduate school is involved.
I think the most weve seen is someone with 25 different loans, he says, adding that the average is closer to six to eight loans.
SoFi customers were paying about 7% to 8% on average before being able to refinance with fixed rates as low as 3.5% and variable rates as low as 1.9%. Their average debt size was $70,000. SoFis lending terms have translated into significant savings. On average, we save $12,000 for our customers in interest savings, Macklin reports.
As many as 70% to 80% of Americans are leaving college with an average of nearly $30,000 in debt, and thats the lower end of the scale, he says. Its a much bigger number for anyone going to graduate school or taking longer to graduate.
Theres now $1.3 trillion in student loans out there, and theres 40 million Americans that have student loans, he continues. So I think its a great time for companies to offer a tangible solution in an area that affects millions of people across the country.
As many as 90% of all student loans were made by the federal government, whose terms change every few years, while the remainder have come from private banks with a wide range of rates, according to Macklin.
Its worth noting that offering student loan refinancing can be a huge recruitment tool for candidates who are fresh out of college. When the companies we work with go to university campuses and mention the fact that they have this as an employee benefit, people are extremely interested, he says.
SoFi is working with more than 100 leading companies across the U.S. to offer student loan refinancing benefits to their employees. Theres no cost to the employer, nor are there any origination or application fees for borrowers.
Where we make money is [by] finding investors to fund these loans, Macklin says, and the good thing is, weve been able to reduce the cost of that funding and passed it on to our borrowers. He says that has occurred about five times in just the past six months or so.
There are no participation or implementation fees for Kashables program, which links directly to employees and collects interest on the loans that start at 6% for the least risky borrowers and rise for all others (theyre averaging in the teens). This is the way we make our money, Steklov says. And if an employee was terminated or his deductions are no longer available, the former employee is solely responsible to pay back the balance of the loan directly to Kashable. The employer has no obligation or risk associated with repayment of the loans.
SimpleFi is compensated primarily through fees employers pay in order to offer the benefit to their employees. The charge is about $3 to $4 a month for each employee or nearly $1 when dependents are included. That comes out to about $35 to $50 a year per employee, depending on the employers size. Theres also a utilization guarantee. If theres less utilization than what we charge to cover those costs, then we do refund if we dont meet those goals, Potter explains.
Helping employees consolidate their debt and establish credit is paying dividends at the Alameda County Community Food Bank. Jacobs has noticed a drop in absenteeism and improvement in employee performance since making this benefit available. The dilemma is that people are more willing to talk about being physically ill than in financial distress, according to Jacobs. Theres some kind of shame thats attached to this, she adds.
The lending and credit benefit certainly can be viewed as saving some employees from themselves. Working for an employer with a very paternalistic outlook, she quips: Youve got to force people to eat their spinach!
Hand up vs. handout
But could these inexpensive lending and credit services be merely a Band-Aid approach to serious hemorrhaging in society or seen as enabling people to continue negative spending patterns and not focus on the underlining causes of bad debt and poor credit?
Liz Davidson, founder and CEO of Financial Finesse, is concerned about how easy it is to borrow money today and the potential for people developing an addiction to borrowing. However, she believes that when offered within the right parameters these types of lending services can be a real plus to the extent that the interest rate is reasonable and it deters from payday loans.
Viewing the topics larger context, Davidson prefers what she calls a hand up as opposed to a handout, citing as an example her firms work with the NBA Legends Foundation, which offers grants (rather than loans) to retired professional basketball players on the condition that they work with a financial counselor in hopes of achieving a lasting change in their behavior.
Bruce Shutan is a Los Angeles-based freelance writer.