Data and Research September 26, 2018

Health Care Management Combined With Annuities May Help With Retirement Health Costs

A report details how utilizing the savings through health management can fund staggered annuities to help pay for health care expenses in retirement.

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Health care cost projections illustrate how managing medical conditions through simple, positive lifestyle choices can result in measurable savings for health expenses in retirement, according to a new report from Healthy Capital in collaboration with the Insured Retirement Institute.

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In addition, the report explains how utilizing annuities to provide guaranteed income helps address Americans’ concern for affording health care in retirement. A case study details how utilizing the savings through condition management can fund staggered annuities and create a lifetime income stream.

In the case study, Susan is a 30-year-old professional who just purchased a home and had her first child, but also has type 2 diabetes. The report data shows that between ages 65 and 85, Susan can expect to incur more than $1,000,000 in future costs for Medicare Part D, Medigap premiums, and out-of-pocket expenses. In order to fund this, Susan would have to invest slightly more than $11,600 per year (or $171,769 in a lump sum) in a product that nets 6% annually.

The plan to pay for health care expenses starts with healthy behavior. By managing her type 2 diabetes, Susan learns that in addition to increasing her life expectancy by ten years, she will spend less on annual medical-related expenditures because her new healthy habits translate into fewer doctor visits, services needed, prescription drugs, catastrophic events, and procedures, the report notes. If Susan begins immediately, she can reduce her lifetime health care expenses by more than $190,000, which, when invested in an account that nets 6% annually, will grow to over $240,000 by age 60 (when she purchases her first two annuities) and another $90,000 by age 75 (when she purchases her last annuity).

Managing her condition will also produce average pre-retirement annual health care savings of just over $4,500. Now, Susan’s annual savings goal of $6,675 per year is reduced by more than two-thirds, and she will only have to save $2,175 per year in order to make the initial annuity purchases at age 60 that will help cover her future health care costs.

According to the report, a person’s investable assets, tolerance for risk, general and lifestyle expenses and current health status are important determinants of the level of funding and types of investment and insurance products that should be used to design a health care funding plan. Also, staggering the purchases inherently allows for adjustments to the portfolio (based on changes in health status): an annuity may make sense for Susan at age 60 or 65, but if her health declines by age 75 it may make more sense to use a mutual fund, laddered bond portfolio, or other non-insured approach instead of the immediate annuity.

Annuities require a larger total payment to achieve health care-funding goals. However, while capital-market investments need certain levels of performance to generate income, annuities incur less risk, provide mortality credits (the boost to income resulting from the pooling of longevity risk), and may be a better alternative for an individual investor depending on his/her risk tolerance, the report contends.

Ron Mastrogiovanni, CEO of HealthyCapital and HealthView Services, tells PLANSPONSOR, “The key is education. Product mix may have a significant impact on disposable income in retirement. Different product types impact taxes, hundreds of thousands of dollars in Medicare surcharges and for how long assets will generate income in retirement. Therefore it is important to optimize income in retirement by including the best mix of capital market and insurance products.”

In addition, Mastrogiovanni suggests plan sponsors that have high-deductible health care plans, should include health savings accounts (HSAs) as an option.

Although the case study in the report starts with an individual at age 30, the report says the concepts in this case are applicable to those with other conditions and within different age groups. Modeling shows that regardless of the condition, individuals who manage their health conditions well can add years to their lives (from three to six) and significantly reduce their annual medical expenditures. The accrued savings, if invested, can be worth between $120,000 and $437,000 at retirement age, depending on the condition.

The paper concludes that health-management conversations (which can be started by plan sponsors) can open the door to the appropriate investment products which may provide peace of mind to many Americans who are concerned about paying for health care in retirement. In addition, advisers need to build health care into planning conversations—a topic that crosses all demographics.
Compliance September 25, 2018

Divisions Remain in Courts Regarding the Burden of Proof

A case set to go to the U.S. Supreme Court for a decision about who bears the burden of proof when fiduciary harm is alleged in ERISA cases has been settled. Two legal experts weigh in.

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When Pioneer Centres Holding Co. v. Alerus Financial on September 20 was settled instead of going before the Supreme Court, many people in the retirement legal profession and retirement industry were disappointed. With the case settled confidentially, the expected clarity the decision would offer has been lost. What remains is a significant split among circuit courts regarding the burden of proof in Employee Retirement Income Security Act (ERISA) fiduciary-breach cases.

The 10th U.S. Circuit Court of Appeals found that Pioneer Centres was required to prove a transitional trustee was at fault for a failed transaction and failed to do so.

ERISA and employee stock ownership plan (ESOP) litigator Chris Nemeth, partner at McDermott Will & Emory in Chicago said, “This particular issue that we thought was going to be decided by the Supreme Court is an issue, from an ESOP litigation perspective, that we had been dealing with at a significant level in matters that are publicly filed and in pre-litigation matters and it is an issue that crops up again and again.”

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Nemeth summarizes the issue in his own words: “There’s a split of authority at the Federal circuit level about who bears the burden of proving what is called loss causation—if a plan participant has sued because of harm that the participant alleges is due to action taken by a fiduciary. Certain circuits courts have said causation is an element of a cause of action. Certain circuits have said that it’s the plaintiffs burden to show that the harm was attributable to the fiduciary. Other courts have said that once a participant makes out a prima facia case, alleging the elements, that the burden shifts to the fiduciary to say whatever harm that is alleged to have been caused is not harm that fiduciaries caused. The basis for that is a shifting rule grounded largely in trust law.

“That is, different courts have used these issues differently. For practical purposes what that has meant over the last several years is that in certain instances, people have tried to file lawsuits in different jurisdictions because perhaps certain jurisdictions have a rule that may be more favorable to plaintiffs than defendants.”

The issue behind this case also has implications outside of ESOP litigation because of the way it’s positive for purposes of showing harm. It would be equally applicable in a straight ERISA case that didn’t involve any ESOP, says Erin Turley, partner at McDermott Will & Emery in Dallas.

“While it’s not going to be settled in this instance, it will continue to be split among the circuits and we’re still going to have to know who bears this burden. That’s why I think it’s bigger than just an ESOP case, because that same causation and burden issue is applicable in any case involving a stock bonus, a 401(k) or any type of qualified retirement plan.”

Were Nemeth or Turley surprised that the case was dismissed and the case was settled?  Nemeth says, “These cases are expensive to litigate and pursue, and settlements at any stage of litigation are not surprising. We were hopeful that we would have some kind of articulation in this case from the Supreme Court, but there will be another opportunity in the near future for the court to comment on it.”

Turley says, “Aside from the forum shopping that plaintiffs do because of the non-uniformity of the law, the problems with inconsistencies in the law is that decisions come out in different ways based on similar facts, which is why we’re all the more hopeful that the SCOTUS in the near future will weigh in on it.”

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