How Behavioral Finance Improves Employee Retirement Savings and Financial Wellbeing

The numbers are stark: Three-quarters of American workers say they feel financial anxiety every day. The causes of stress are varied, ranging from insufficient savings (80%) and retirement funds (73%) to ballooning credit card balances (19%).1

Also consider that more than one-quarter of employees spend three or more hours a month working on their personal finances while at work and 40% feel they’d be more productive if they didn’t have to worry about their personal finances while on the job.2

Efforts to educate employees and encourage them to save can help, but not only is it a challenge for employees to pay for fixed expenses, but also to improve their overall financial wellbeing.

Looking at the future through behavioral finance

Behavioral finance points to answers. For instance, it’s hard for younger workers to envision themselves in 20 or 30 years and seeing the need to start saving now for when they’re older.

Looking at oneself in the future is psychologically difficult, as it requires considering the self in the third person. People are wired to the experience of here and now — not to the abstract, distant concept of future financial security.

Those challenges and the success of defined contribution savings plans, point to a growing recognition that employers have a special role to play in helping their employees to become more fully financially secure.

The Pension Protection Act of 2006 (PPA) made changes to retirement planning that continue to reverberate a decade-and-a-half later.

The PPA’s introduction of automatic enrollment in plans, auto-escalation of contributions and the use of default investments such as target-date funds have had profound effect on retirement plans. All of these features made it easier for participants to engage with the plan and actively save money for retirement.

Behavioral finance’s role in financial wellbeing

Given employee stress over finance, it’s no surprise behavioral finance is now being leveraged to help financial wellness overall. And when employees’ financial wellness improves, so does their engagement with the retirement plan.

This points to the importance of financial wellness programs, which address employee stress over finances and their poor engagement with retirement plans as a result.

Another way to look at it: How can employees save for the future when they’re in debt today, barely able to pay bills? It doesn’t help that many workers, no matter how good they may be as employees, have a poor financial education and aren’t making sound financial decisions as a result.

Making it about more than retirement

In fact, many employees need help with budgeting, financial planning and saving. And perhaps the most effective financial wellness programs combine education with elements that are similar to what the PPA did for retirement savings.

For instance, tax deductions on college savings and college loan payments give a great incentive to address that albatross. Workers see employer matching contributions as “free money” (while being a tax deduction for employers).

By expanding the use of these tools to help employees pay off student debt, the employee is bound to benefit from greater stability and improved overall financial wellbeing.

Employers will benefit from having an engaged, loyal, and less stressed and distracted workforce. In a way, it’s a virtuous circle: Because they are making better financial decisions today, employees have more money to save for retirement, leading to less stress, more productivity and a greater commitment to financial wellness for the long run.


This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC (GRP), a registered investment advisor. Insurance services offered through HUB International. GRP, Washington Financial Group and HUB International are separate and unaffiliated with LPL Financial. Washington Financial Group is the approved name under which LPL Financial business is conducted.

1 Human Resource Executive, “Employees looking for help as pandemic increases financial stress,” November 6, 2020.

2 John Hancock, Stress, finances and well-being: The impact of the pandemic on the American worker, accessed February 28, 2022.

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