Benefits July 25, 2019

Education About Health Benefits Can Lower Costs for Employers and Employees

Many employees don’t understand health benefits—including that most insurance covers preventive care. Better education can lead employees to use benefits correctly and become healthier.

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Health care coverage is ranked as one of the top three benefits an employer offers by nearly 80% of employees surveyed by Lively, a health savings account (HSA) platform for employers and individuals.

This is more than any other benefit—competitive salary and a 401(k), respectively, follow.

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But, employers know that health care coverage is the most costly benefit to provide and health care expenses are among the highest expenses for employees. So, it is not only important to provide a great benefit, but to educate employees about their benefits so they use them properly, which leads to lower costs for both employers and employees.

According to Lively’s survey of 1,000 randomly selected U.S. adults ages 18 and older, conducted June 5 and June 6, 30% say they completely understand their health benefits and 32% say they somewhat understand them. However, other surveys have found employees do not understand some benefits as well as they think they do—especially HSAs.

Respondents to Lively’s survey report confusion over high-deductible health plans (HDHP) and health reimbursement accounts (HRAs). The survey found that young people (ages 18 to 24) have far less understanding of preferred provider organizations (PPOs) (18%) and health maintenance organizations (HMOs) (19%).

“Without a full understanding of health care plan options and the benefits each can offer, it is difficult for employees to know they are choosing the best-fit plan,” Lively notes in its research report.

This could lead to higher costs for both employers and employees. For the 2017 plan year, 56% of large employers on the Benefitfocus Platform offered an HDHP in addition to “traditional” copay-based plans—up from 52% the previous year. However, employee selection behavior analyzed by Benefitfocus indicates HDHPs are not right for every employee. For example, Benefitfocus says, an employee in an HDHP who should really be in a PPO can do much more harm than good to a company’s bottom line in the long run. If unable to afford paying out-of-pocket cost, the employee may go into debt or forgo necessary care, which could mean greater costs down the road.

In addition, a survey by HSA Bank revealed that nearly one in five consumers are not able to identify their health plan type. The firm notes that plan type influences how consumers access care and pay for health care services because the health insurance plan determines the in-network providers, treatment and prescription coverage, as well as premium, copay, coinsurance, deductible and out-of-pocket costs. Knowing the costs involved in one’s health care is key to being an engaged consumer. Thirty percent of consumers don’t know their premium, deductible or out-of-pocket cost amounts.

Studies show that going to the doctor regularly and preventatively is more effective for long-term health and well-being, yet only 54% of adults surveyed by Lively report that they do this. Almost half only see a doctor if they are sick or something catastrophic happens (such as a broken bone). Lower-income adults tend to only go when something catastrophic happens. Lively suggests many employees may not realize that their health insurance plan covers some level of preventive care, so helping employees understand all the components of their coverage will allow them to take full advantage of their insurance.

“Building in wellness programs within employee culture, as well as flexibility for employees to make and attend doctors’ appointments, is imperative to fostering a healthy work environment,” Lively adds.

Lively also suggests offering a wide breadth of insurance plans and options to employees, and educate them about the differences. “Health care is already complicated, so finding ways to simplify it for your hard working employees is crucial to their overall health and wellness. Health care plan cost details are changing rapidly and acronyms alone will not tell employees what is best for them,” the firm says. It suggests employers find tools to explain the differences between PPOs, HMOs and HDHPs as well as HSAs, health flexible spending accounts (FSAs), and HRAs.

And while it seems counterintuitive to holding costs down, finding ways to financially support employees’ health and wellness, like contributing to an HSA or sponsoring employee gym memberships can lead employees to use benefits correctly and become healthier, actually lowering overall health care spend for employers.
Data and Research July 24, 2019

Researchers Propose Including Annuities as a Default in 401(k)s

An analysis found defaulting a portion of balances in deferred income annuities (DIAs) would boost income for retirees later in life, and researchers offered suggestions for implementation by defined contribution (DC) plan sponsors.

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Very few defined contribution retirement plans in the U.S. today pay out lifetime income streams, leaving retirees at the risk of runing out of money in old age. In a report issued by the Brookings Institution, researchers propose to include deferred lifetime income annuities (DIAs) as a default in employer-provided 401(k) plans.

They conclude that defaulting a portion of retirees’ portfolios into DIAs “is a practical and attractive way for plan sponsors to provide a lifetime income for workers in defined contribution accounts.”

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To illustrate how this idea would work, the researchers built and calibrated an economic model to assess the impact of defaulting a portion of retirees’ 401(k) assets at age 66 into a DIA that commenced paying benefits at age 85. This model was used to measure how much better off people would be from defaulting a relatively small portion—10% of retirement plan assets above a threshold –into such a deferred income annuity.

Researchers Vanya Horneff, with the Finance Department at Goethe University; Raimond Maurer, with the Finance Department and Goethe University; and Olivia S. Mitchell, with the Wharton School at the University of Pennsylvania note that required minimum distribution (RMD) regulations were amended in 2014 to allow the provision of longevity income annuities within the 401(k) space, as long as they were deferred lifetime income annuities (starting benefits no later than age 85) and limited to less than 25% of the retiree’s account balance. Accordingly, a retiree’s DIA annuity purchase need not be counted in determining her RMD basis, meaning that this change dramatically relaxed the RMD requirements that had precluded the offering of longevity annuities in the 401(k).

The U.S. Department of Labor has interpreted the 2006 Pension Protection Act by identifying the types of products that can be included in the plans while still maintaining fiduciary protection. These new deferred lifetime income products are referred to as “qualifying longevity annuity contracts” (QLACS).

For the analysis, annuities are priced using a unisex table derived from the US Annuity 2000 mortality table provided by the Society of Actuaries (SOA) and assuming an interest rate of 1%. The researchers say they are also sensitive to the concern that some workers may anticipate higher mortality rates than the population at large, and for such workers, it may be less attractive to buy longevity annuities. They address this by defaulting 10% of workers’ assets into a DIA only so long as they have at least $65,000 accumulated in their 401(k) accounts.

The analysis found that prior to age 85, consumption differences are small either way: the median difference is only $3 at age 50. But by age 85, the retiree with the default DIA can consume about $700 more per year on average, and $2,600 more by age 95. “Overall, we conclude that the risk of consuming less is very low for those with the default DIA, while the possibility of enhanced consumption at older ages with the DIA is very high,” the report says.

The researchers also looked at the change in welfare if retirees were to optimally switch their 401(k) assets into the DIA, instead of the employer having to default 10% over the $65,000 threshold. As an example, the analysis finds in the optimal case, women having at least a college education use 14.5% of pension accruals to purchase the DIA, which increases welfare by $15,384 (or 7% of retirement assets). This is a relatively small difference ($1,863) versus the default case of using 10% over the $65,000 threshold to purchase a DIA. Differences are even smaller for the other education groups and similar for males. “Accordingly, including well-designed DIA defaults in DC plans yields quite positive consequences for 401(k)-covered workers,” the report says.

What plan sponsors can do

The researchers note that one factor that all seem to favor in the design of retirement annuitization is to avoid an “all-or-nothing” decision, where the retiree is forced to convert his or her entire nest egg into an insured income stream. The partial annuitization of 10% of assets over a threshold should reduce retirees’ concern about lacking liquidity in old age. The researchers suggest persuading defined contribution (DC) plan sponsors to describe all benefit amounts in the 401(k) plans as monthly or annual income streams, so as to emphasize the role of the DIA in helping retirees meet consumption needs, rather than as a “loss” of access to a portion of their account balances.

“It is also likely that retirees whose consumption needs are covered by a relatively secure income stream from Social Security paired with their DIA benefits would be willing to take more investment risk with their liquid 401(k) or IRA assets. In this way, the DIA could help enhance retirement security, enabling households to benefit from the equity premium later in life. This could be a particularly important strategy in light of the permanently lower interest rates that many financial economists expect in the future,” the report says.

The researchers also say a related approach might be to include DIAs into a target-date fund (TDF) intended to carry older workers not only ‘to’ but also ‘through’ retirement. Regulations issued by the U.S. Department of Labor (DOL) have made it possible to embed lifetime income offerings into TDFs, naturally with full disclosure provided to participants. Because annuities generally do not provide workers with an option to move from one firm to another, it is believed that the appropriate point to begin offering embedded annuities would be at or near the employee’s retirement age, the researchers suggest.

They also suggest directing the assets generated by the employer contributions and matches to the DIA. Current law allows plan sponsors to require that the employers’ contributions be held in a deferred annuity, and it would even be feasible for the employer contributions to be defaulted into a DIA.

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