With the right tools, employers have the power to break the paycheck-to-paycheck epidemic

Financial point solutions can provide low cost, temporary relief to high financial stress and gaps in cash flow, but they are ill-equipped on their own to serve as long-term solutions.

In the current hyper competitive labor market, employers are racing to provide better menus of benefit offerings to attract and retain talent. Many have turned to benefits that help employees navigate financial challenges through financial point solutions such as buy-now-pay-later shopping programs, small dollar employer loans, and ever-popular earned wage access programs.

The unfortunate truth is that many of these point solutions cause more problems than they intend to solve.

If employers continue to offer these financial benefits, they must also equip workers with the knowledge on how to best use them, combined with foundational financial wellness guidance. It’s this holistic package that has been proven to help Americans improve their financial situation and weather unforeseen financial challenges, both acute and long-term.

The last few years have not been kind to the American worker economically, and demand is high for income smoothing options. It’s understandable given the ongoing epidemic of people living paycheck-to-paycheck – totaling up to 60% of U.S. adults across all income levels, 74% of Americans making less than $50,000, and even 45% of six-figure-income earners.

Historically, workers who were in a cash crunch turned to 401(k) loans, early 401(k) distributions (with ensuing taxes and penalties), or ultra-expensive payday loans. Thanks to recent fintech innovations, employees can now access their paychecks early through earned wage access (EWA) and similar financial point solutions.

These benefits have provided a lifeline to some employees, relieving the financial pressures that families face while managing liquidity challenges in today’s unforgiving economy. And employers’ recruitment efforts have benefited from being able to offer seemingly attractive financial benefits.

However, much remains to be seen regarding the long-term effects of financial point solutions—for both employees and their employers. Far too often these services are utilized as a band-aid solution to larger underlying issues.

For instance, point solutions can result in a misguided sense of financial wellbeing and reckless spending that can make it difficult to pay for major obligations, like rent or emergencies. In this way, chronic usage of EWA creates a cycle of financial stress like that of payday loans. And copycat services offered directly to the consumer without direct employer-payroll oversight are not required to provide Truth-in-Lending disclosures, putting users on the wrong foot from the start.

On the employer side, it’s unclear that investing in financial point benefits actually improves recruitment, retention, or employee satisfaction. A recent case study from the retail behemoth Walmart should give pause. After providing EWA as a new benefit to hundreds of thousands of their employees, the retailer found that the point solution alone does not guarantee better employee retention—and may even contribute to increased turnover.

It’s clear that these point solutions are not in and of themselves the issue, but how people use and misuse them to perpetuate harmful financial habits.

Financial point solutions can provide low cost, temporary relief to high financial stress and gaps in cash flow, but they are ill-equipped on their own to serve as long-term solutions to the underlying financial challenges. Of course, the high cost of stress and anxiety cannot be overrated, affecting workers and employers alike in terms of lost productivity, lack of focus, absenteeism, turnover, higher health care costs, and more.

Given that employees come to the table with all different financial backgrounds and levels of knowledge, employers should provide a robust suite of financial benefits to break the paycheck-to-paycheck cycle. This can help ensure that employees understand how to use financial point solutions in a way that is helpful—as a short-term financial intervention—rather than in a way that creates new harmful behaviors. Financial wellness and coaching benefit programs, for example, provide unbiased, expert guidance and financial education to target the underlying financial challenges and behaviors that are the root of workers’ stress.

Read more: Infographic: Workplace top priority is financial wellness

recent study from the nonpartisan Employee Benefits Research Institute (EBRI) indicates that companies are increasingly choosing to adopt holistic financial wellness programs in lieu of pilot or single point solution programs. The Walmart case study and others have demonstrated that combining a short-term point solution with ongoing financial education and coaching is more effective at retaining employees than financial point solutions alone.

For millions of workers, it takes more than a detailed budget, cutting back on spending, or the occasional payday advance to break the cycle of living paycheck-to-paycheck. It’s in the best interest of employers to not only encourage better financial behavior, but also alter their benefit offerings to truly support the financial wellbeing of their employees.

Dr. Mark Dennis, CFP®, is a Personal Financial Coach at Financial Finesse and Lead Researcher for the company’s Financial Wellness Think Tank™. His research efforts focus heavily on the field of behavioral finance.