Super Literacy: From Bamboozlement to Engagement— The Bottom Line for Funds and Employers

1. Super Literacy: From Bamboozlement to Engagement—The Bottom Line for Funds and Employers Dr. Thomas Garman November 11, 2004

2. Contents • What is financial literacy? Why does it matter? • What does poor financial literacy cost? • What is effective financial education? • Who should take the lead? • What are the outcomes? • Final messages

3. What is Financial Literacy? “The ability to make informed judgments and to take effective decisions regarding the use and management of money” CLTF • Being a good money manager means…. • I understand financial products and how to use them to achieve my goals and monitor my progress • I know I am doing okay • How many good money managers do you know?

4. What are the Results of Good Financial Literacy? Concepts, principles and knowledge test scores for school children; however, for adults… Good money managers have a high level of ‘Financial Well-being’ • They have the3 Cs • Attitudes, Behaviours, Control, andConfidenceto succeed financially The best financial education makes this happen, and note that this is not product education

5. Four Easy Literacy Questions? • “How confident were you at age 25 to invest $5,000 for retirement 35 years later?” (Confident or not?) • “Can you choose to be financially secure?” (Disagree or agree?) • “Does the financial health of your members/employees drive the financial health of your business?” (Disagree or agree?) In fact, good member/employee financial well-being drives employer profits and Super Fund success.

6. One Who is Not Financially Literate… Education ONLY about products contributes to financial illiteracy. Why? It makes people… • Makes poor spending choices • Overly indebted • Postpones saving • Suffers financial stress • Is bamboozled • Has multiple super accounts Not Engaged Passive Anxious Confused

7. Aware Active Confident Motivated One Who is Financially Literate…is Engaged in Money Issues • Comparison shops • Achieves short, medium and long term savings goals • Product selections match savings goals • Enjoys average to above average financial well-being The custodian on my floor who makes US$16,000 has high financial well-being

8. Why Financial Literacy Matters • 88% report they have only basic financial skills; 60% lack confidence to make a financial decision; 46% are anxious about it(Money Solutions) • 48% unaware of choice of fund(ACNielsen) • 2 generations of working adults have low literacy(CFLTF) Average age of Australian nurses is 46 years; it’s 48 for teachers. They did not learn personal finance in schools, thus they are in desperate need for workplace financial literacy education.

9. Why Financial Literacy Matters • The costs and responsibilities of choice concerns both funds and employers • Employees will make choices when they join and leave an employer (20% pa) • Choice will cost funds/employers money spent on education, more than current estimates • However, some people still will make poor choices • Current ‘product education’ emphasis has had little impact on savings • Thus, financial literacy is a community issue

10. Key Questions • How literate are your members/ employees? (How literate are YOU?) • Can they assess their money management choices? • Can they make the ‘right’ financial decisions?Human Resources Director’s recent workshops on only 3 choices resulted in confusion because the employees were not provided education to understand the choice information before them • Are they ready for choice?

11. What Does Poor Literacy Cost? • Financial stress is a major source of relationship tension • Stress adversely impacts health, job errors, workplace accidents • Lower national savings because those with low financial well-being cannot save $10 - $20 per payslip • Results in higher burden on public purse

12. What does Poor Literacy Cost? Australian Research… • 2/3 lack funds to meet retirement goals (ANOP) • 50% are not saving for retirement (FPA) • Cost of mistakes is high: for someone earning $36,000 per annum, up to $790,000 is potentially lost lifetime wealth (CFLT) • Baby Boomers under-prepared (ANOP) • Singles and women are even less prepared(ANOP) • 31% of families with children in financial difficulty (CBA Smart Savings Survey 2003)

13. What does Poor Literacy Cost? US Retirement Savings • 1 in 5 adult workers are overly indebted and financially distressed • 75% do not save or do not save enough “For many American workers, their VISA balance is larger than their 401(k) balance” “Many American owe more on the SUV parked in their driveway and on their MasterCard than their balance in their 401(k) account (median 401(k)=US$55,000)”

14. Pay no attention to the elephant Can you recognise afinancially stressed employee? No! What does Poor Literacy Cost? Tom’s research says: “Every time someone on your work team brings his/her money worries to the job, workplace productivity drops”

15. US $1B Poor Financial Literacy: US NAVY • 43% problem paying bills; officers 45% • Bad checks – 174,000 • Wages garnished – 108,000 • Bankruptcies- 4,300 • Security revocations – 60% • Non-deployment - 28% Teleconference: ADF has similar issues

16. Key Question • What does poor financial literacy cost your organisation? • The total cost of poor financial literacy for all Australians could run into the billions • Poor financial literacy is very hard on individuals and families • Lost productivity is a big issue TODAY

17. What is Effective Education? • Aims to improve ‘financial well-being’ by building the right attitudes, behaviours, control, and confidence (The ABCs) • Provides a blend of education, guidance, coaching, and advice to reinforce learning and motivate to take next steps (Guidance and coaching is not in the US model; hats off to good Australian financial educators) • Empowers people to believe ‘I can do this’ • Money skills are learned habits, like driving a car (My mom taught/coached me to drive) • Most people learn best by doing, not reading

18. What is Effective Education? Learning framework/structure should- • Build knowledge, involvement, confidence, motivation, and action • Offer an on-going process to change savings habits • Be personal (to one’s money experience and to one’s investment experience) and relevant(at MY teachable moment; Tommy saves $2,000 a year for only 10 years starting at age 21, but twin Timmy does not begin until age 31 and he will never catch up) • Be interactive • Should be scaleable, accessible, and affordable (Please note that this is not just product knowledge education)

19. Effective Education Includes? Interactive Learning sparks curiosity 1-on-1 Guidance changes behaviors Scaleable Education Complex Advice Single Issue Advice Financial Advice Most people need this 50% 80% Some people need this 20%

20. Key Questions • How much are you spending on financial education today? • Does it engage your members/employees? • Is it delivering results? • Do you know what quality education should achieve? • Do you know how to measure success?

21. Funds and Employers Should Take the Lead • Super decisions and most learning occurs in the workplace • Both are major beneficiaries of a literate population • Both offer the most relevant places where education can be provided continuously

22. Why Should Funds Take the Lead? Choice - • Opens the market to more competition • Gives members the power to make good or poor choices (Funds want members to be well-informed) • Creates opportunities and risks for every fund (Fidelity and other US companies are expanding their workplace financial education efforts because they now recognize they risk losing US$500,000 or US$1,000,000, or more, from too many long-time members who move their money to funds that offer more a engaging, personalized and empowering financial education program) Financial success for funds is based on growth in both funds under management and members

23. Why Should Employers Take the Lead? Choice - • Will be exercised at work • Will be confusing for many • Will require additional resources • Will create the risk of litigation

24. Why Should Funds and Employers Work Together? • Become the “fund of choice” and “employer of choice” • Share the cost of quality education • Measure the outcomes If your education provider is not delivering, sack them!

25. Key Questions • What can your organisation do TODAY to deliver quality financial education effectively to your members and employees? • What organisations can you collaborate with to improve member/employee financial well-being?

26. Fund Outcomes • Members • Retention and attraction • Higher voluntary contributions • More funds under management • Lower benefit protection costs • Better asset allocation decisions • More satisfied members • Achieve long-term savings objectives • Make better use of other member benefits

27. Employer Outcomes • Research (Tom’s and others) shows that financial well-being has little to do with income or age. • Research shows that as financial well-being rises, these factors definitely improve for many employees (holding income and education constant) • Stress about money issues • Health and work life (FWB predicts 25% of health) • Pay satisfaction • Job performance rating • Intention to quit employer • Retirement savings contributions • The fact is that financial well-being definitely predicts these job outcomes

28. Australian Financial Well-being Scale The Australian Financial Well-being Scale measures one’s subjective financial well-being It comes from researching people’s ‘poor’ and ‘good’ financial behaviors AFWBS – Made up of 10 questions on the ABCs of financial well-being (attitudes, behaviors, control, and confidence) Stands on the shoulders of 20 years of US research Developed in cooperation with University of Melbourne professor of tests and measurements AFWBS assesses one’s “Financial Health” much like a doctor checks one’s temperature, blood pressure and heartbeat AFWBS 10 questions ask: How satisfied, How well off? How do you feel? ‘It’s all about me!’ Am I in control? Am I on track financially?

29. Australian Financial Well-being Scale (Insert slightly skewed distribution here; insert two 20% boxes below toward left and right sides of distribution; insert words “Take a snapshot of employees’ financial well-being and then look at last year’s absenteeism and job performance ratings for those employees with good FWB [upper 20%] and poor FWB [lower 20%], and take those results to executives”; place a ‘US 5.7’ at appropriate point in distribution) 20% 20%

30. Employer Outcomes These are the outcomes that can be expected from good financial well-being • Cost Savings • Absenteeism and sick days • Workers’ compensation claims • Turnover • Accidents and errors • Disciplinary actions • Revenue Gains • Less work time spent on finances • More presenteeism (Present, but not focused; Talent2 November 2004 study of 1,000 Australian found 20% waste at least one full day of work each week) • More productive key personnel • Retention of ‘best’ employees

31. Employer Outcomes • US employers can expect $450 in job outcomes from each employee who slightly improves financial behaviours and financial well-being (Tom’s research) • Based on a program cost of $150, this is a ROI of 3:1 • A similar return might be expected in Australia • WHY? Because work outcomes are directly related to financial well-being

32. The Financial Well-being Scale Allows YOU to… Benchmark how your employees are doingfinancially – today • Get baseline data now using the Australian Financial Well-being Scale • Apply Quality Financial Education • Ask later on if and how much– • Financial behaviours and well-being have improved • Work outcomes improved • Calculate the ROI – WHY? PTO

33. Employer and Fund Outcomes “Our goal at Monsanto is to have employees who are so financially astute and so financially secure that they work for us because they want to not because they have to.” (CEO response to why employees, spouses and significant others are given 6-8 hours per year to learn financial education on company time) Schlumberger  United Parcel Service  Weyerhaeuser  IBM  Mobil  US Department of Defense  TIAA-CREF  Chrysler

34. Take Action! • Choose a financial education provider who does it the “right way” and shows a commitment to measuring the results • Benchmark the levels of financial well-being before and after implementing a program • Calculate the ROI on work outcomes • Explain the bottom-line argument to CFO and other executives

35. Key Questions • Do you understand what money skills your members/employees need? • What is the strategic benefit? • Do you want to be a fund/employer of choice? • How can you measure what you implement?

36. Final Messages • Australian research shows that financial literacy is low and has substantial hidden costs • Quality financial education can deliver a substantial payback • Funds and employers have the responsibility and opportunity to address the issue TODAY

37. Final Messages • Changing people’s money behaviors, habits and skills creates more confident, self-reliant and productive members and employees • When people understand what they need and why, they are empowered to save for the future (They create their own utopia of financial well-being) • Who will be the early adopters and champion financial education?

38. In Closing • I leave Super Funds, their members, employers, and their employees with the immortal words of the great US baseball player, Yogi Berra, of the New York Yankees, who often fractured the English language with his truisms like: ‘If you don’t know where you are going, you will end up somewhere else.”

39. Thanks!