Harry Markowitz: Financial Wellness

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Financial Literacy is a buzzword in the workplace today. Financial literacy is a big part of this wellness trend. With the retirement crises and other related issues, there is a push to improve the financial literacy of Americans of all ages. Many 401(k) plan sponsors have joined this movement and view it as a good business move for a number of reasons.

We felt that nobody is more qualified than our Chief Architect, Nobel Laureate Dr. Harry Markowitz, to weigh in on the topic of financial wellness. We spoke with Harry recently and here is what he had to say.

What is financial wellness?

Dr. Markowitz described being “financially well” as being able to cover your current needs as well as those that will come up in the future. Another way of stating this might be the ability to meet your day-to-day obligations while also having enough to cover long-term goals like college for your kids or your own retirement.

How can employers help improve financial wellness?

Dr. Markowitz made the point that employers are coming at this late in the game, financial wellness training should start in grammar school.

He added that part of our approach at GuidedChoice is to ask people relevant questions about their situation to help gauge the level of risk they are taking with their investments, versus what might be appropriate for them. This is the same approach that you take with your individual clients.

We take their responses and show them the consequences of their investment and savings decisions. What is the impact of taking a bit more, or less risk? Are they saving enough to meet their goals for retirement and other milestones? We show them the power that compounding can have on their investments and their ability to achieve their goals.

The result of showing people the consequences of the current strategies is often that they save more and invest in a fashion that is more appropriate for their risk tolerance and time horizon. In our experience, showing people the consequences of their actions often leads to a marked change in their behavior.

Common mistakes investors make

Dr. Markowitz made the point that too often individual investors will buy into stocks once the market has made some nice gains. They don’t want to miss out on the gains that friends and others have made. They also assume the market will continue to rise.

They often compound this mistake by panicking and selling when the market drops. We saw a lot of this type of activity during the financial crises of 2008.

Professional investors will set an asset allocation, say 60/40 stocks to fixed income. If stocks go up and their allocation to equities increases to 70%, they will sell off some of their equity positions to rebalance their portfolio back to their desired 60/40 allocation. This is the type of disciplined behavior we endeavor to teach plan participants.

Why financial wellness should matter to employers

The concept of employee wellness has caught on in the workplace. Many companies apply this to the health of their employees in an effort to reduce their health insurance costs.

The same principle applies to financial wellness. First, helping employees in this area is just the right thing to do. Beyond this, financial stress is real and reduces productivity in the workplace. Helping employees become more financially literate in all areas can help reduce this stress and boost productivity.

Specifically regarding retirement, helping employees prepare for a successful retirement helps ensure that they will retire.

Many employees work longer for financial reasons, potentially blocking the career progression of younger employees. This creates an uncomfortable situation for the company.

What role do you want to play?

As a plan sponsor, your organization should be the focal point in helping your employees improve their financial literacy. It’s the right thing to do for them and can help your company’s bottom line as well. A true win-win. At GuidedChoice, we can help. Please contact us to learn more about how we can partner together.