How Income-Advance Loans Help Financially Stressed Employees

Access to emergency loans prevents 401(k) hardship withdrawals

By Greg Goth February 18, 2020
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"Financial wellness" has become a catchphrase among employers that want to help employees navigate financial challenges, such as by teaching workers how to manage a household budget. But one veteran researcher of the U.S. workplace says these offerings often miss their mark.

Ellen Frank-Miller, senior scientist and adjunct professor at the Washington University of St. Louis' Social Policy Institute, thinks too much of the discussion around financially stressed workers "implies that if we could just get these people to be responsible and save money, they wouldn't have these problems." But in her view, "we're really giving employers a pass" when it comes to helping workers experiencing financial stress.

Frank-Miller and her colleagues have noted that average liquidity among low-earning households is only $855, based on data gathered through the 2016 Household Financial Survey of 16,650 U.S. adults employed full time or part time. Add a financial shock to limited resources, and the researchers discovered a cascading effect, not only on employees' financial stability but also on the stability of their employers' business operations.

When the researchers looked at the relative attractiveness of employer-provided services to employees at different income levels, they found that one offering in particular—the income-advance (IA) loan—helped employees who need assistance the most.

Built on Bridges

"Employees' financial instability and their need to access emergency loans is part of running a small to midsize business," said Ned Castle, outreach coordinator for the Rhino Foods Foundation, an affiliate of Burlington, Vt.-based Rhino Foods, owned and founded by his father Ted Castle, which provides IA loans for its approximately 150 employees.

Rhino Foods and two other Burlington area businesses—Engelberth Construction and the University of Vermont Medical Center—help employees obtain small emergency loans of up to $1,000 through a partnership with the NorthCountry Federal Credit Union. Employees repay the amounts to the credit union through automatic payroll deduction.

A local United Way program called Working Bridges helped the employers launch the loan program and sends a resource coordinator to their worksites to coach workers about loans and local resources to help with life issues, such as child care, that can affect work productivity.

Among the benefits being realized by these businesses is improved employee retention. Rhino Foods saw its annual retention rate increase to 85 percent of the workforce, up from 65 percent at the loan program's launch in 2008, which Castle attributes in large measure to IA loans.

Castle and his father established the Rhino Foods Foundation to help other businesses set up their own IA loan programs, modeled on the success of the Burlington employers.

Seven Steps

The IA loan program pioneered by the Burlington-based employers has seven simple steps:

1. An employee in need of emergency financial aid is directed to HR.

2. HR handles intake by having the employee fill out a brief online application that scans for eligibility.

3. HR notifies the credit union to enroll the employee.

4. The employee completes an online loan application for the credit union.

5. The funds are disbursed to the employee as soon as that same day.

6. HR and payroll set up loan repayment through paycheck automatic deduction.

7. After the loan is repaid, the automatic deductions continue into a savings account at the credit union unless the employee opts out.


HR at each of the participating employers serves as the facilitator between their employees and the credit union. The employers pay the credit union a small administrative fee negotiated separately by each employer.

The employers do not secure the loans per se, but because the loans are repaid through payroll deduction, it serves as a kind of de facto securing mechanism.

This short video explains the loan program at Rhino Foods, although the process is similar at the other Burlington employers.

Income Advance Guide: "The Income Advance value proposition" from Rhino Foods on Vimeo.

Easy for HR, Boon to Employees

Gina Catanzarita, HR director at Engelberth, called her firm's IA loan program low-maintenance and "a proven product." While it provides participating employees with immediate funds, it also helps prevent one of the most common wealth-killers in the workplace: early withdrawals from 401(k) accounts.

With 401(k) withdrawals, employees "would take out $3,000 even if they only really needed $1,000," she noted. When IA loans were made available to the firm's 170 employees, "We went from four or five [hardship withdrawals] a year to none, which was exactly what we wanted to see."

'We went from four or five 401(k) hardship withdrawals a year to none, which was exactly what we wanted to see.' 
— Gina Catanzarita, HR director at Engelberth

Any Engelberth employee who has been with the company for a year is eligible for the program, and once a loan account has been established, it remains open so subsequent requests can be easily processed. The interest rate paid to the credit union on the loans is around 17 percent—far less than the rates for short-term payday loans, which can climb to 400 percent—and repayment through payroll deduction keeps default rates low.

Program participants "get up to $1,000 in their account they can use that afternoon," Catanzarita said.

Since the program's inception, 50 of Engelberth's employees have taken out a combined $168,000 in loans. Some have used the program regularly over the years. Total annual employee loan amounts have fallen recently, from about $25,000 each year for 2012 through 2014 to about $4,000 last year, perhaps reflecting better financial times.

Although after the loan is repaid employees can halt the automatic deductions into their savings account at any time, only about 5 percent choose to opt out.

Delivering FInancial Wellness

Castle and Catanzarita both said this system helps employees build savings and improve their credit rating.

"There's some brilliance there in automatically converting the loan payment into a savings deposit," said Mat Despard, faculty director with the Social Policy Institute at Washington University.

The IA loan is one component of a larger financial wellness effort, Castle pointed out. Getting people to come to budgeting and financial wellness workshops can be hard until they're in the midst of an emergency, he explained, so when they apply for an IA loan, that's "the time to have training available, because people are more likely to do it."

"If you have the HR capacity to take on a new benefit, this is a no-brainer," Castle said. "People will feel the impact of this in such a deep way, making your business a place where people want to work."

Despite Improvements, Many Still Have Money Worries

U.S. employees' financial well-being has improved, but many still live paycheck to paycheck and are worried over the future state of their finances, according to a survey of 8,000 U.S. employees by consultancy Willis Towers Watson.

The 2019/2020 Global Benefits Attitudes Survey found that 43 percent of U.S. workers are now satisfied with their financial situation, an increase from 35 percent in 2017. However, the survey revealed some worrisome findings:

  • 39 percent of employees could not come up with $3,000 if an unexpected need arose within the next month.
  • 38 percent live paycheck to paycheck.
  • 32 percent have financial problems that negatively affect their lives.

"Many employees are struggling with their financial situation even as the job market and economic conditions improve," said Steve Nyce, senior economist at Willis Towers Watson.

Financial stress hampers employee productivity, engagement and health, he said. This is especially true among "struggling" employees, identified as those who live paycheck to paycheck and have difficulty controlling spending.

About one-fourth of respondents are classified as struggling, and roughly half of struggling employees reported experiencing stress, anxiety or depression over the past two years.

Shane Bartling, senior director for retirement at Willis Towers Watson, believes that, "with the right actions and insights, employers can help lower the financial risks that workers face" and that access to appropriate benefits and decision tools can ultimately improve well-being.


Greg Goth is a freelance health and technology writer based in Oakville, Conn.

Related SHRM Articles:

Helping Employees Save for the Unexpected Pays Off, SHRM Online, August 2019

6 Ways to Measure the Success of Financial Wellness Efforts,SHRM Online, January 2019

Employers Double Down on Financial Wellness, but Approaches Differ, SHRM Online, November 2019

Financial Wellness Perks Expand to Address Employee Needs, SHRM Online, June 2018

On-Demand Pay Apps Are Catching On, SHRM Online, December 2018

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