The Health Effect

The sinking feeling you feel in the pit of your stomach as you read the IRS audit letter … the pounding in your head that starts with opening the plumbing bill … or the feeling of self-satisfaction that comes with receiving a big bonus and raise.

Most of us have experienced the connection between health and wealth, especially when our fortunes ebb and flow. It’s only recently, however, that scientists have confirmed this phenomenon and applied it to business.

Financial advisers can help employers capitalize on this growing body of knowledge to reduce costs and enhance productivity by helping their employees make the most of their defined contribution retirement plan. It starts with the recognition that stress—especially angst caused by financial issues—is a great robber of wealth.

Researchers John W. Ayers of San Diego State University and Benjamin Althouse of Sante Fe Institute, who studied Google search patterns during the Great Recession of 2008-11, revealed a huge uptick in Americans researching maladies such as stomach ulcers, headaches, and chest and back pain.

Those financial stresses came with real costs, especially at the workplace. Dr. E. Thomas Garman, director of the National Institute for Personal Finance Employee Education, calculated in 2006 that financially stressed employees cost an additional $2,000 a year more than other employees in higher absences, medical bills and lost productivity. After all, it’s hard to concentrate at work if your car is being impounded, right?

Conversely, those who tend to their financial well-being and take prudent steps such as contributing to their 401(k) retirement plan are much more likely to enjoy both financial and physical health, according to a 2013 study by researchers at the Olin Business School. Those who contributed to their 401(k) showed 27% improvements in abnormal health test results and poor health behaviors compared to non-contributors.

Employers are taking stock of the cause and effect of financial issues, especially as the Federal Reserve recently reported that 31% of non-retired Americans have no retirement savings or pension. The Fed didn’t say how many had stomachaches.

The Fed also determined that one in four pre-retirees—those ages 55-64—expect to work as long as possible, a long-term and largely hidden cost that employers are only now beginning to understand. Compared to their younger co-workers, older employees typically have higher health care costs, are more likely to become disabled, and often cash bigger paychecks.

That’s why more employers are looking for advisers and plan providers to help employees retire when they qualify for full Social Security benefits, typically age 66 or 67. A good benchmark for retirement readiness is when an employee can replace 75% of his or her pre-retirement income from Social Security, savings and a pension, if available.

Advisers can help accomplish that mission by working with providers to overcome obstacles posed by both non-savers and low savers alike. Different and complementary initiatives can be employed to overcome barriers due to factors such as inertia, loss aversion and even myopia. Each employer and employee population is unique, so advisers need to take the time to understand the issues preventing retirement preparedness and act accordingly.

For instance, if an employer has low 401(k) participation, one reason might be that workers are delaying signups and need prodding. Depending upon the situation, advisers can work with a plan sponsor to employ a range of strategies such as automatically enrolling new or even existing employees in the plan, or launching a campaign to encourage participation.

If the problem is low deferral rates, the employer might automatically increase deferrals by 1% a year until reaching a ceiling, perhaps 10%. Low account balances could also be related to conservative investment choices, which can be overcome by educating participants on investment options such as target date funds, simplifying investment choices, or offering asset allocation modeling.

Whatever the problem, an individual solution needs to be prescribed to help employees fatten their retirement plan balances and improve the overall health of the retirement plan.

Economists have long known of the “wealth effect,” whereby consumers are more likely to spend and consume more goods and services as their wealth rises or at least their perception of their wealth improves. By encouraging employees to save for retirement, employers are promoting what we might call the “health effect”: improved physical and fiscal bottom lines.

E. Thomas Foster Jr. is assistant vice president, strategy and relationships, for MassMutual Retirement Services, a division of Massachusetts Mutual Life Insurance Co., Inc.