Hardship funds look good on paper -- but don't build financial resilence

The last couple of years have been extraordinary for America’s workforce. The silver lining is businesses have become increasingly empathetic, and are putting the voluntary benefits and programs in place to really support employees both inside and outside the workplace.

To help employees with financial stress, some companies have begun offering employee hardship funds, providing grants that are interest-free or that don’t need to be paid back. According to data from EBRI, more than a quarter of employers currently offer emergency fund/employee hardship assistance and nearly 30 percent percent plan to offer it.

Why now?

Since the start of the pandemic, the percentage of working Americans that have no money set aside from emergencies has spiked considerably. In third-party research conducted pre-COVID, Salary Finance found that about half of working Americans had no money set aside for emergencies. A year later, that number grew considerably to more than two-thirds of American workers. It’s not as if it’s not a priority, either – nearly 50 percent of working Americans say saving money is one of their top financial priorities.

The other reason businesses need to lead with empathy is more self-serving: employees hold the upper hand. With the Great Resignation, people are leaving their jobs in droves – and a competitive job market gives them peace of mind to know they can go elsewhere if they want.

Because companies now recognize the need to address employee financial stress, offering a hardship fund can be an attractive option. Unfortunately, hardship funds heap additional administrative burden on the already overworked HR teams who often administer them, and the operational mechanics can be cumbersome or off-putting for both the employer and employee.

Hardship funds are complex: to stand one up, a company needs to determine the structure, eligibility requirements, request processing, and funding mechanism. Unlike other financial wellbeing benefits that don’t require employer funding, hardship funds cost companies money.

These funds can also cross a personal line, because they don’t allow for anonymity. To obtain hardship assistance, employees often need to apply and give a reason for why they need the money. This puts the company in the awkward position of determining who deserves the funds – and obviously brings up anonymity concerns on both ends. As a result, employees that most need the help may not feel comfortable asking for it.

If you’ve already started a hardship fund, you’ve likely dealt with or are dealing with these pitfalls and may be seeking a better way. If you haven’t, here are some other programs you should consider to build financial resilience amongst your employees.

Education

While education alone is unlikely to lead to financial resilience, it’s a starting point. Implement a financial education program for employees that is easy-to-navigate and addresses the basic challenges so many people have when it comes to their personal finances: how to budget, open and monitor bank accounts, set aside emergency cash, set financial goals, understand and improve your credit score, and recover from financial setbacks. Ideally, materials should be available in different formats so employees can learn in the way they prefer: articles, videos, in-depth guides, calculators, etc. – and access to outside services like coaching and referrals, who can help employees with their most urgent financial issues.

Responsible credit solutions

A recent Financial Health Network study found that, with little access to affordable credit solutions, nearly a quarter of employees withdrew money against their retirement funds in 2021. Worse yet, more than 12 million Americans use payday loans each year, with the average borrower taking out eight loans of $375 each, and spending $520 in interest. Most states have no max charges, making the pain from these loans even more substantial.

As consumer debt continues to rise, employment-secured affordable credit solutions have emerged as an impactful financial wellness benefit. The same Financial Health Network study found that more than 60 percent of employees would be more likely to stay at a job that offered useful debt-related benefits. They are easy to manage – employers don’t need to worry about approving applications, it provides anonymity for the employer and employee, and there’s no cost associated for the employer.

Savings

Needless to say, employees struggling with debt or lack of savings are financially stressed – and employees who are financially stressed are at best distracted and at worst disruptive in the workplace. Benefits are now available through which a percentage of earnings can be deposited into an employer-sponsored savings account. In this way, employers can play a considerable role in helping employees build savings. Whether it’s when an employee first starts at a company and is setting up direct deposit or receives their annual bonus or raise, you can advocate for your employees to begin working toward a savings goal – often times, at no cost to them. .

Once employees start to put aside even a small amount from each paycheck into a dedicated savings account, a powerful habit is created. Having a savings account that’s linked to their paycheck, but separate, allows for peace of mind that they could easily transfer funds in an emergency, but not have those same funds commingled with the money coming out for routine bills or daily purchases.

The decision to offer a hardship fund is a noble one – but they can be much more effective when leveraged with other benefits and programs that encourage financial literacy and long-term resilience. Consider your employee population – leverage surveys, analyze data on what programs employees are using, review what programs are being requested – and put the programs in place that will supplement hardship funds. After all, bankrolling hardship funds for an extended period of time could wreak havoc on the bottom line without responsible programs to complement them.

Dan Macklin is CEO at Salary Finance.