Administration July 19, 2019

Stopping a Retirement Crisis

Currently, America has a retirement plan coverage gap, a retirement savings gap and a guaranteed income gap, which plan sponsors and lawmakers need to address to avoid a retirement crisis.
Reported by
Art by Lars Leetaru

Headlines say there is a retirement crisis in this country, but in reality it is an impending retirement crisis that sources say policymakers and retirement plan sponsors can take measures to avoid.

“We have a retirement challenge that is very serious, and if we don’t act, it will migrate from a challenge to a crisis,” says Roger Ferguson, chief executive officer of TIAA in New York. There are three components to this challenge, he says: a coverage gap, a savings gap and a guaranteed income gap.

Coverage gap

Among those workers who are offered a retirement savings plan, the system works pretty well, says Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA) in West Palm Beach, Florida. “But we have to continue to close the retirement savings coverage gap,” Minsky says. “We need to broaden the pool of people who have access to workplace retirement savings plans.”

Get more!  Sign up for PLANSPONSOR newsletters.

Only half of Americans are offered a workplace retirement savings plan, Ferguson says, which means those who are not offered one are going to be totally dependent on Social Security, which he contends will not be enough. This means that employers that currently do not offer a workplace retirement savings plan need to seriously consider doing so, he says.

And once they begin offering one, it should automatically enroll participants into the plan at a meaningful deferral rate, 6% or higher, and include automatic escalation, says Jeff Winn, managing partner at International Assets Advisory in Orlando. It is incumbent on sponsors to encourage and enable people to save as much as they can, Winn says.

Eventually, predicts Mike Swann, client portfolio manager, defined contribution team at SEI Investments in Oaks, Pennsylvania, the government will require employers to offer retirement plans and mandate that workers participate in them.

Provisions in the SECURE Act, passed by the House and stalled in Congress, which would expand retirement plan eligibility to part-time workers and allow for multiple employer plans (MEPs) to be joined by employers without a common nexus, could help narrow the coverage gap.

Savings gap

“Sponsors are really the ones that should be doing the education on the importance of saving for one’s retirement,” Winn says. “They have stepped up to the plate with low-cost investments, primarily due to fee compression, but if there is any area where they are falling down, it is educating people about the critical need to save adequately for retirement.”

To put this in perspective, the Federal Reserve and the Government Accountability Office (GAO) have estimated the retirement savings shortfall in the U.S. to be between $4 trillion and $7 trillion, Ferguson says. “A recent GAO report says that 30% of households where the head is between the ages of 55 and 64 have no retirement savings or a defined benefit plan, and among those who do have savings, the median savings is $104,000, which translates into $310 a month in income. That tells you the degree to which the savings shortfall is” serious.

“Companies need to help their employees understand the critical need to save, and encourage them to start early,” Winn says.

Guaranteed income gap

Retirement plan sponsors also need to think about offering in-plan annuities that guarantee lifetime income, Ferguson says. “People are living longer, which means they need to be provided guaranteed income that they cannot outlive,” he says. “More than half of 65-year-old men will live to age 85, and one-third will reach age 90. Two-thirds of 65-year-old women will live to age 85 and half to age 90.”

Ferguson says he is encouraged that the SECURE Act includes a safe harbor provision for in-plan annuities, which are the most cost-effective way to purchase them.

“For most Americans, being able to guarantee a level of lifetime income is of nearly paramount importance,” says John Lowell, a partner with October Three in Atlanta. While in-plan annuities are rare, he is hopeful that the increasing discussion about the need for steady, reliable retirement income will lead to designs that facilitate in-plan annuities.

Plan sponsors can also help encourage lawmakers to shore up Social Security, says Ric Edelman, executive chairman of Edelman Financial Engines in Fairfax, Virginia. For those Americans who make $40,000 or less, Social Security will provide a substantial amount of their money in retirement, he says.

“The typical American retiree gets the bulk of their income from Social Security, and if Congress does not act, in 2035, the benefits will be cut by 23%, meaning that $1,400 a month will become $1,000,” Edelman says. “Should that occur, millions of American retirees would lose their homes and be unable to buy adequate medicine or food. We would face an economic crisis the likes of which we have not seen since the Great Depression.”

This is why Edelman has launched the Funding Our Futures coalition, which sponsors can join, he says. The coalition, which currently has more than 40 members, is working to educate Americans about how the Social Security trust fund is in danger of being depleted so that they will turn to their Congressional representatives to ask them to take action. “Nobody gets elected cutting Social Security benefits or raising Social Security taxes,” he notes. “We need to create the political will to solve the problem.”
Compliance July 17, 2019

Employees in Two States Miss Out on One HSA Benefit

Is this impacting health savings account (HSA) participation?
Reported by
Art by John Malta

Health savings accounts (HSAs) have been available for more years than many may realize.

They seem to have come into the spotlight when estimated stats for health care costs in retirement began appearing. Couples retiring in 2019, according to Fidelity, can expect to spend $285,000 in health care and medical expenses throughout retirement, up from $280,000 in 2018.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

But in reality, HSAs were authorized by the Medicare Prescription Drug Improvement and Modernization Act of 2003 and signed into law by President George W. Bush on December 8, 2003. HSAs entered the market in January 2004 and were originally developed to replace the medical savings account (MSA) system used primarily for self-employed individuals.

Begonya Klumb, head of HSA, Fidelity Health Care Group says, “There is no disguising the sense of urgency we hear from employers and individuals who say that rising health care costs are among their biggest financial concerns. In fact, one-in-four Americans say that health care is the most critical issue facing our country today.”

These accounts offer individuals a way to save money while managing their health care costs. They combine a high-deductible health plan (HDHP) with a tax-favored savings account. But account contributions are limited: Calendar year 2020 limitations were recently released. The annual limitation for an individual will be for self-only coverage under a high deductible health plan will be $3,550. For an individual with family coverage under a high deductible health plan is $7,100. These are increases of $50 and $100, respectively, from the 2019 contribution limits.

The appeal of these accounts is that in most states’ HSA participants have a triple-tax benefit. Unlike defined contribution retirement plans, which incur federal and state taxes, HSAs offer tax-free contributions, tax-free growth on balances and tax-free withdrawals for qualified health expenses, making them a powerful savings and investing tool to address both current and future health care expenses.

But there are a few exceptions at the state level to this triple-tax advantage that many people, including plan participants, do not seem to be aware of. California and New Jersey are the two states that do not offer tax-free contributions at the state level while all states are exempt from federal government taxes on HSA contributions.

As of the 2005 tax year, six states—Alabama, California, Maine, New Jersey, Pennsylvania and Wisconsin—did not exempt HSA dollars from state taxes. But currently, besides California and New Jersey, Alabama was the last outlier when it eliminated similar rules on January 1, 2018.

The Impact of State Taxation

Asked if state taxation in these two outliers’ states will change in the foreseeable future, J. Kevin A. McKechnie, executive director, HSA Council at American Bankers Association, says, “So far there has been no legislative movement from either state. To go tax free would cost these two states millions of dollars—and every year that they wait will cost them more because there are millions of more HSA owners all the time.”

“For California, this is the first week of the new gas tax. The idea that they’ll think about reducing taxes when they are taxing more necessary products, is unrealistic,” according to McKechnie. And New Jersey has the highest property taxes in the nation.

Answering the same question, McKechnie says, “The value proposition is you let people pay on a tax advantage basis for the things they are going to use anyway. It’s never changed. It’s been the same since HSAs were inaugurated yet people choose them when their employer chooses to offer them.”

Looking at Fidelity Investments customer data, Klumb says, “We do see that adoption of HSA-eligible health plans is slightly lower in New Jersey and California than we see nationally.  But for those who are enrolling in an HSA-eligible plan, we see high HSA adoption rates: 93.2% (CA) and 94.4% (NJ).  These are actually slightly higher than the national average of 92.8%. In addition, the average annual contributions by HSA owners in those two states is also higher than the national average.

Should people in these states that are offered eligible HSA plans still save in HSAs? McKechnie says, “There is no question that they should. The very rich won’t be impacted but lower income workers are still better off in an HSA plan than any alternative. If people of more modest means, which is most HSA owners, stop saving in HSAs, they will need to pay federal money to satisfy their deductibles and co-pays. That may be why California and New Jersey still aren’t acting. Because people with HSAs are still better off than all the other citizens. That could be one of the plausible reasons not to mirror what every other state has done.”

In April 2018, America’s Health Insurance Plans (AHIP) released an update to its annual survey showing that enrollment in HSAs/HDHPs totaled at least 21.8 million as of January 2017, reflecting a 9.2% increase since the previous year. This survey was based on responses from 52 insurance companies. For context, based on these and other survey results, more individuals are enrolled in HSAs/HDHPs than the entire Medicare Advantage program—Medicare offered by private companies approved by Medicare. 

Forty-two health insurance providers reported enrollment to AHIP by state and U.S. territory for 15.6 million lives with HSA/HDHP coverage as of January 2017. States with the largest reported HSA/HDHP enrollment levels were Illinois (1,623,027), Texas (1,534,513), Minnesota (1,178,559), Ohio (1,008,177), and California (1,001,308). New Jersey had 223,926.

The double-edged sword is that, from an education perspective, participants may not be aware that they are being taxed by the state and not being taxed by the federal government.

Klumb says, “It goes back to one of the biggest challenges of the industry, which is education. We need to get people to really understand the advantages of high deductible plans paired with HSAs—the advantage of saving not only for managing current health care expenses but also to save for future health care expenses in two, three, five years or in retirement. We still see a lack of understanding of the basics of how the account works so it wouldn’t surprise me if there were no big difference in the behaviors. As we look across the state data, it looks like people would not even be aware of the state taxes.”

McKechnie says, “Everyone knows the parameters of an HSA at this point. My question to the states is what are you hoping to gain from these taxes? If it’s just revenue, then they must hold the view that people are already saving enough for their retirement, people are saving enough for their Social Security, and those are two laughable premises on their own that are not true.”

«