PLANSPONSOR - October/November 2020 - 29

WELLNESS STRATEGIES
and type of debt, explains John J. " Jack "
Jefferson, a financial adviser with Waddell
& Reed in Woburn, Massachusetts.
Credit card debt, for example, typically
comes with high interest and high
transactional fees when carrying a
balance. This type of debt needs immediate
attention and a definite payoff
strategy, Jefferson says.
Many plan sponsors, in fact, have
already heeded the call to help their participants
get debt-free. According to the 2020
PLANSPONSOR Defined Contribution
(DC) Survey (see page 20), 32% of plan
sponsors offer credit card debt management
and 38% agree strongly that financial
wellness programs are very useful to
employee participants. Such programs
can discuss other, and better, options for
participants in need of immediate cash.
Jefferson advises people to look to
take advantage of the low interest rates
available on certain types of loans. If they
have equity in their homes, they may
want to look at remortgaging or using
a home equity line of credit to pay off
higher interest debt. High credit card
debt is one definite instance where it
is worth suspending contributions to a
retirement account for a more pressing
purpose, Jefferson says. " Maintaining
balances on high-interest credit cards
can be a death spiral. "
For instance, a plan participant who,
long term, owes $25,000 on a credit card at
a 20% interest rate and defers 15% of salary
into his defined contribution (DC) plan,
may be short-sighted. The participant
may be earning 5% interest annually in
his plan, but paying out $5,000 in interest
annually to the bank.
Plan sponsors or plan advisers need to
be frank with participants about how deferring
salary to save for retirement should be
put in perspective, as many participants
hear the drum beat about the need to save
for retirement but neglect to look at their
own big picture financial situation.
All of this is placing greater importance
on how employers select their individual
benefit offerings and how they
educate workers on the role of each. It also
makes current or pending open enrollment
periods especially important.
Voya research finds that more than
70% of American workers plan to spend
more time reviewing their voluntary
benefits during open enrollment this fall,
and more than half (53%) plan on making
changes. Lavallee says sponsors need to
be ready to answer questions and help
educate their employees about voluntary
benefits such as critical illness insurance,
hospital indemnity insurance and health
savings accounts (HSAs).
" This is an uncertain time for many
individuals today, and it brings about a shift
in mindset when it comes to the holistic
wellness needs of many employees; [the
sponsor needs] to think about their overall
financial wellness from a combined health
and wealth benefits perspective within the
workplace, " Lavallee says.
" We recommend that individuals
utilize resources offered by their employer's
workplace plan, calculate their immediate
needs, and consider the tax implications
of withdrawing from their retirement
account, " Lavallee says. " People work hard
for their retirement savings and should dip
into that as a last resort. "
Another solution, which some
employers are putting into place for
employees, is an emergency fund as a
way to help ride out rough times.
" Without adequate financial reserves,
there is no alternative but to increase
personal debt to meet obligations. This
then starts a vicious cycle of increased debt
that, without the ability to repay, leads to
long-lasting credit issues, " says Bethel.
" As much as we emphasize having
three to six months of expenses in an
emergency fund, many don't do it, "
Bethel says. " It takes something like the
pandemic to make participants understand
its importance. " -David Weldon
Reverse Order?
Consider the following situations, in which it may make sense for
participants to save for retirement before paying off debts:
* If participants are older and nearing retirement, it might be in their best
interest to make a retirement fund their top financial priority.
* If employers match 401(k) contributions, it is worth it for participants
to take this free money, which can make up for any interest they will
accumulate on unpaid debts.
* If participants are in debt due to a mortgage, vs. credit cards, paying
down their mortgage may not be a priority. Paying off a credit card
creates available credit at your disposal. If necessary, credit cards
may be used to borrow money. But paying a mortgage does not free
up additional credit. Further, a mortgage almost always carries a lower
interest rate than a credit card, reducing the need for immediacy.
* If the debt is reasonably small, participants could continue making the
minimum payment and setting aside some money for retirement. With
only a small balance remaining on the debt, the participant may be
able to wipe it out fairly soon anyway.
* If participants feel more comfortable with cash on hand,
should consider starting a retirement fund sooner rather than later.
Source: Debt.org
then they
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