BY MICHAEL WILBERT
EVEN IN “GOOD” TIMES many employees face a major hurdle when confronted with an unexpected expense and how to pay for it. With the impact of the coronavirus pandemic on employee paychecks, those hurdles are even higher. There are, however, an array of voluntary benefits that could be important now more than ever for keeping financially-stressed employees out of deeper water.
All of us in the benefits industry—brokers, employers and providers have been aware, even before the pandemic, of the industry statistics that many employees are living paycheck- to-paycheck and are stressed about their finances. Most workers don’t have enough emergency savings for unexpected expenses and struggle to make minimum monthly payments on credit cards and loans. The problem is even bigger than that because their financial stress also distracts them at work.
Whether it’s student loans, car payments, mortgage/rent payments, credit card debt, an unexpected expense or some other financial matter that they are worried about, the bottom line is that employees are spending time at work on these issues rather than doing the job employers are paying them to do. When employees bring that financial stress to work, it results in low productivity, absenteeism and, in many cases, higher healthcare costs.
THE IMPACT OF UNEXPECTED EXPENSES
Here’s a snapshot of unexpected expenses that employees were experiencing prior to the pandemic this year. Results of a Harris Poll survey of 807 U.S. adults who are employed full-time revealed that 83% had an unexpected expense in the past 12 months (January – December 2019). The survey was conducted on behalf of Purchasing Power® in December 2019.
It’s interesting to look at the household income ranges for those who had unexpected expenses. Surprisingly, the higher the household income, the more likely the employee was to have an unexpected expense:
- Less than $50,000 – 76%
- $50,000 – $74,999 – 80%
- $75,000 – $99,999 – 84%
- $100,000 – 86%
Employees also were asked what the unexpected expenses were. According to the survey, they included:
- vehicle repair/replacement – 48%
- medical costs like a sudden illness or increase in cost due to pre-existing conditions – 35%
- travel for things such as a funeral, sick relative or unexpected move – 28%
- replacing or upgrading a major home appliance that stopped working – 28%
- home repairs – 27%
HOW EMPLOYEES PAY FOR UNEXPECTED EXPENSES
Paying for those unexpected expenses can send those living paycheck-to-paycheck further into debt. According to the same Harris Poll survey, those who had unexpected expenses in the past 12 months covered those costs with a credit card (41%); cash (37%); money that was earmarked for other household bills (24%); money from their emergency fund (23%); a payday, title or home equity loan that they specifically took out for this unexpected expense (16%); by selling something such as jewelry, electronics or a car (15%); by borrowing from friends or family (15%); or by borrowing from their retirement savings (12%).
With so many workers living paycheck-to-paycheck, it’s easy to see why they are financially stressed. But life happens. Inevitably, an unexpected expense will occur. Examples include a major appliance that breaks down or a leaky roof that needs repair; a medical issue that results in large bills prior to reaching a super-high deductible; or their college freshman’s laptop that needs replacing. This is life. Situations are going to occur but they become insurmountable obstacles when financial resources aren’t available to make better choices. And then factor in a corona pandemic on top of that.
When just one financial situation disrupts the paycheck- to-paycheck cycle, it most likely means that person enters into a perpetual cycle of trying to catch up—but that never happens. Financially-stressed employees regularly find themselves in this perpetual cycle and they never reach the end. They often end up deeper in debt because they qualify only for subprime credit or no credit at all. The level of credit available to employees varies significantly and can be a major source of financial stress. Some workers have no credit options at all. Others don’t have many credit options, but are able to secure some subprime credit that carries a high APR which quickly adds up. According to the non-profit Credit Builders Alliance, the average consumer with subprime pays $200,000 more for credit over the course of a lifetime. And then there are those who have prime credit, better financing options and interest rates, but still can be pushing their balance maximums to the limit and be overextended.
Some employees will cover unexpected expenses by withdrawing from their retirement plans and, unfortunately, these funds usually don’t get replaced. They are also using high-risk credit options that often come with hidden costs and associated fees that take a financially fragile situation
and make it worse, such as rent-to-own deals and payday/title loans.
COVID-19 FINANCIAL STRESS AND UNEXPECTED EXPENSES
There’s no question that COVID-19 has thrown a curve ball into our entire lives and our financial circumstances. The “new normal” from the effect COVID-19 is having on jobs and the economy has created even more financial stress. Employees are worried more than ever about money. In fact,
a March 2020 FinanceBuzz study showed that Americans are more worried about unexpected expenses (79%) and paying their bills (68%) than they were about catching COVID-19 (63%).
VOLUNTARY BENEFITS THAT EMPLOYERS CAN PROVIDE
One way employers can help the situation is making sure employees are aware that voluntary benefits, as part of their overall employee benefits program could be a smart alternative for covering unexpected expenses. Often, employees aren’t aware some of these benefits exist because it wasn’t something they needed in the past. This is a good time for benefit communications about options in the employee benefits plan that might be helpful during this time.
AMONG THE VOLUNTARY BENEFITS THAT CAN HELP WITH UNEXPECTED EXPENSES ARE:
- Employee purchase programs that allow workers to purchase consumer products and services through payroll deduction when they are unable or prefer not to use cash or credit. The program is an alternative to high interest credit cards and other sub-prime financing options for customers desiring to pay for a purchase over time.
- Low interest installment loans and credit that help employees avoid payday loans and cash advances from credit cards when they have emergency needs such as unexpected out-of-pocket medical expenses.
- Student loan repayment benefit programs in which employers are making contributions to loan balances or providing methods for employees to refinance their debt
- Automated savings programs that encourage employees to start taking control of their financial future by saving money each month from their Many employees don’t have $1,000 or more in savings to use for emergencies and saving a little each month can help build that emergency fund.
- Bill payment programs that empower employees with debt pay down strategies and the ability to make recurring bill payments on-time each month through payroll
THE MESSAGE FOR BROKERS
The corona pandemic is bringing even greater focus to the need to cover unexpected expenses. Brokers may want to consider reviewing some of these voluntary benefit options and recommending them to clients who might not already have some of these options as part of their total reward strategy.
These voluntary benefit options may be one way to help ease employees’ financial stress, in addition to improving the employers’ bottom line.
MICHAEL WILBERT is chief revenue officer at Purchasing Power, a voluntary benefit provider. He leads sales and account management for the company. Michael has 30 years of experience in the insurance and voluntary benefits industry. Previously he served as senior vice president at Reliance Standard Life.
Michael can be reached at mwilbert@purchasingpower.com or (404) 609-5100.