Benefits June 20, 2018

PSNC 2018: Health Meets Wealth

One important purpose of offering more holistic benefits and education that link health and wealth concerns for employees is that it “prevents the 401(k) plan from being treated like a checkbook.”

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According to Nathan Voris, managing director for business strategy at Schwab Retirement Plan Services, and Michael Kane, managing director of Plan Sponsor Consultants, there is an increased recognition among employers that employees’ stress about debt and finances can be just as detrimental to physical health and job performance as a serious illness.

The pair shared their outlook during a panel discussion on the final day of the 2018 PLANSPONSOR National Conference, held last week in Washington, D.C. As Voris and Kane explained, the vast majority of retirement plan officials they speak with feel financial stress is significantly impacting participants’ daily lives, diminishing their ability to plan effectively for retirement and resulting in a lack of productivity.

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To combat the challenge, employers are looking for new ways to help employees with monthly budgeting, planning for college savings or medical costs, and reducing debt.

“All of these are crucial and interrelated financial decisions, and they should have an impact on what health care plan employees select,” Voris observed. “It really doesn’t make sense from the participant perspective to bifurcate these issues, health and wealth. And from the employer’s human resources perspective, these two subjects must be linked for effective service.”

Kane agreed, observing that one important purpose of offering more holistic benefits and education that links health and wealth concerns for employees is that it “prevents the 401(k) plan from being treated like a checkbook.”

“There a numerous academic studies out there demonstrating the various ways financial stress impacts productivity and absenteeism, leading to delayed retirements,” Kane said. “Just take the prevalence of 401(k) plan loans for people with less than $60,000 per year in income—it’s something like 60% or more. The statistics show the wellness need is huge.”

Voris and Kane noted that retirement plan recordkeepers and advisers each can help plan sponsors build a plan for better linking health and wealth topics.

“A big part of this effort will be building out a marketing plan,” Kane suggested. “We have seen plan sponsors have success getting participants to go through education modules or take specific actions by using gift card giveaways, for example. What is the most impactful thing you can do? Have your CEO write a letter directly to employees and explain why this is important and that employees’ physical and financial health are valued. If this is tied to a digital rollout it can be incredibly powerful.”

Voris added that “picking goals and metrics for measuring the performance of any new programming will be very important.”

“When it comes to setting goals and designing a strategy, I always recommend starting with the data and bringing together the stakeholders,” Voris noted. “This will include the recordkeeper, the health care provider, and maybe even your insurance providers as well. The goals, strategy and time frame are different for everyone, so getting the objectives set and mapping out the required data is key.”

Kane concluded that “the use of an adviser or coach is huge here.”

“In our experience, the adviser will be critical in getting these programs created and actually rolled out,” he said. “You may also consider integrating the efforts of customer relationship managers from the recordkeeper for the financial wellness topic.”

Data and Research June 19, 2018

Firms Offer Framework for Planning for Retirement Health Costs

Due to the variations in a person’s life and health status year over year, joint research from Vanguard and Mercer encourages investors to focus on factors they can control and plan accordingly using five guidelines.

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Vanguard has issued a new framework, jointly developed with Mercer, that helps pre-retirees and retirees better understand the financial planning implications of annual health care costs and long-term care expenses.

The research paper, “Planning for healthcare costs in retirement,” outlines key health care cost factors and personal considerations, as well as frames health care expenses as an annual cost rather than a lifetime lump sum. “Most analyses available in the marketplace today point to a daunting out-of-pocket healthcare expense over the lifetime of a retiree. These large dollar values can be demotivating for investors from a psychological and behavioral perspective,” Jean Young, co-author and senior research associate in the Vanguard Center for Investor Research, says. “Instead, our model focuses on the more manageable task of planning for incremental, annual healthcare costs, while separately considering and integrating the potential for long-term care expenses.”

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Based on the joint analysis, Vanguard recommends several important changes to the way health care costs are typically discussed and modeled, and recommends that investors focus on five key areas: health care cost factors, replacement ratios, annual cost framing, substitution effects, and long-term care.

According to Vanguard, one of the most impactful inputs in understanding potential costs is the volume of health care services a person may consume in retirement, which can be estimated based on pre-existing chronic conditions and family health history. Another significant influencer on out-of-pocket health care costs is the type of Medicare coverage that a retiree selects, and whether their income dictates additional surcharges. Individuals retiring before age 65 will need to have a financial strategy to bridge their health care coverage until Medicare eligibility begins.

Due to the variations in a person’s life and health status year over year, the research encourages investors to focus on factors they can control and plan accordingly using the following guidelines:

  • Understand costs. Individuals should understand how their health status and other personal factors might affect their annual health care costs. Coverage choices should be informed by health status, retirement age, and income.
  • Understand employer subsidies. Individuals should understand the difference in the health coverage cost they pay now with the help of any employer subsidies, and what they will have to spend in retirement. Having a clear picture can help avoid potential “sticker shock” and better prepare retirees for their out-of-pocket health care expenses.
  • Target higher replacement ratios. Some retirement savers may encounter a large incremental change in health care costs when they retire due to the loss of generous employer subsidies or declining health, and may want to save at higher rates now to offset these factors in the future.
  • Consider health savings accounts. Health savings accounts (HSAs) can be used as a means to save, in a highly tax-efficient manner, for unforeseen health care expenses in retirement. Investors can save in these accounts today, and reduce the impact of future health care costs by having earmarked tax-free savings.
  • Weigh Medicare enrollment options carefully and revisit annually. Decisions involving the choice between traditional Medicare coverage only, traditional Medicare with a supplement, or Medicare Advantage depend on each retiree’s needs and circumstances. Retirees should assess their situation each year and make adjustments accordingly. However, the opportunity to adjust may be limited.

Long-term care costs

Long-term care costs represent a separate planning challenge given the wide distribution of potential outcomes, Vanguard notes. Half of individuals will incur no long-term care costs—but 15% could incur expenses exceeding $250,000. Even if the probability is low, Vanguard encourages retirees to confront the possibility of an extended, expensive long-term care stay, given the magnitude of the potential cost.

Retirees should first consider unpaid care options such as family support and acceptable types of paid care, as well as Medicaid rules should resources be depleted, the research paper suggests. Funding for long-term care expenses can take many forms, with the biggest resource being private, out-of-pocket spending.

In building a framework for retirement, individuals should have assets that serve as a source of annual income, as well as a contingency reserve to cover long-term care costs or other unexpected expenses. Additional considerations can include home equity, and income annuities for surviving family members.

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