How voluntary benefits can address the financial hardship of coronavirus
There’s certainly nothing new about the fact that employees experience financial stress. Bills stack up, unexpected expenses inevitably pile on and the great cycle of money worries continues ad infinitum.
But what is new? A global pandemic that has brought an unprecedented, unexpected rainy day to all of our budgets.
Those who weren’t already living paycheck-to-paycheck may be feeling some of that pressure now. Those who didn’t have savings set aside for an emergency are trying to figure out how to make ends meet while navigating this new normal of uncertainty and upheaval. Now more than ever, employees need options for meeting their short-term financial needs without compromising their long-term finances.
A silver lining in this storm cloud? Many employers already offer (or can easily begin to offer) an array of voluntary benefit options that provide employees tangible solutions to weathering this financial stress. Often, employees aren’t aware their benefit plans include some of voluntary benefit options because they may not have needed them in the past. In most cases, these voluntary benefits are available at no cost to the employer.
Here are three ways voluntary benefits can help employees alleviate some of their financial stress:
Give them alternatives to high-interest credit cards. Paying cash or using a low-interest credit card is the ideal way to buy what we need, but that’s not always a reality for many American workers. As we know, credit card debt is at an all-time high. Even those who qualify for prime credit may already be carrying sizable balances on their cards and barely making the minimum payments. Many employees also carry student loan debt, which has also reached an all-time high.
Give them alternatives to borrowing from their 401(k). A retirement savings plan is supposed to be a nest egg for the golden years. With Social Security benefits simply inadequate for most Americans, a 401(k) is an essential part of an employee’s future financial security, replacing pensions as the dominant form of retirement income. However, one in five (21 percent) of U.S. adults who are employed full-time borrowed from their 401(k) just in the last 12 months, according to a survey conducted by The Harris Poll on behalf of Purchasing Power in December 2019.
The survey showed that employees have been borrowing from their 401(k) prior to retirement to cover mostly short-term needs such as vehicle repair/replacement, medical costs, replacing/upgrading major home appliances and home repairs. And that’s likely to increase during the onset and aftermath of the current coronavirus environment where so many employees are affected by more unexpected expenses.
If an employee pays back a loan from their 401(k) on schedule, it usually results in only a minor effect on retirement savings progress. That doesn’t always happen, however, because many employees don’t or can’t pay back these loans. It is possible, then, that employees who turn to borrowing from their 401(k) will lose the full opportunity to build wealth for their later years.
Give them alternatives to costly payday/title loans or rent-to-own options. Payday loans, credit card cash advances and rent-to-own programs can seem like a tempting quick fix but come with serious caveats. These loans often come with high percentage rates and fees, as well as extremely short repayment schedules. With rent-to-own, renters can end up paying as much as three times the retail value of an item before satisfying the terms for ownership.
What are the alternatives?
Employees need options to purchase what they need, when they need it without sinking into an inescapable debt cycle. Voluntary benefits such as low interest installment loans and credit as well as employee purchase programs can help them get what they need now minus the worry of a hefty down payment or ballooning interest. Manageable payments can be made via payroll deduction over a reasonable one-year term with no late fees or hidden costs.
Other smart alternatives that are becoming more readily available include instant pay benefits and payroll advances that can give employees increased access to their money when they need it and without the worry of high interest/fees. Automated, payroll-deducted savings accounts can help employees begin to build their emergency funds for the future.
Financial stress is an ever-present reality even when we’re not facing down a global pandemic, but right now that reality is magnified, and our employees have immediate financial needs they are struggling to meet. They need options that don’t involve escalating debt or borrowing from their retirement future. Voluntary benefits are one way employers can help.