PSNC 2021: Savings Hierarchy — Allocating Between DC Plans, HSAs, Savings and Debt

After a year-plus of thousands of retirement plan participants experiencing increased financial anxiety, plan sponsors are trying to determine how to prioritize specific finances.

“First, you really want [participants] to create a budget or spending plan,” Samuel Moroni, a senior wealth strategy associate for UBS Financial Services, said during a panel at the 2021 virtual PLANSPONSOR National Conference (PSNC). “This will help them achieve their financial goals by giving them a road map and prepare them for those emergency savings and other roadblocks.”

Moroni said plan sponsors and participants cannot establish a proper savings or spending plan without analyzing finances first. He said sponsors should ask participants what their financial priorities are: Are they trying to have six to eight months’ worth of available cash? Are they trying to buy a home, save for a child’s education or save for retirement? Are they trying to maximize on employer contributions? From there, participants can create their own financial goals and path to achievement, he said.

Tina M. Wilson, senior vice president and chief product officer of Empower Retirement, touched on using digital tools to help build a plan, saying that digital platforms alone will not work unless the plan sponsor focuses on educational and communication strategies to increase participation. “Utilizing human help from your provider, adviser or a financial wellness solution will really help your entire population,” she said.

Renee Lipp, benefits coordinator of the Harris County School District, a winner of one of this year’s PLANSPONSOR Plan Sponsor of the Year awards, recounted her team’s experience in using gamification—the practice of incorporating game-playing elements to engage participants—in the plan’s program. Prior to the pandemic, in 2018, Lipp and her team noticed more participants were financially stressed, as a higher number were taking loans out from their 403(b) accounts than in the past.

“We launched a financial wellness program to address their financial stress points,” she recalled. “Gamification was one of the most exciting parts, because it’s an interactive portal that they enjoyed and it was a way to engage their financial wealth, assess their retirement readiness, etc.”

At the Harris County School District, Lipp and her team made automatic enrollment the top of their savings and spending hierarchy, followed by identifying short- and long-term goals. Education was third on their list, followed by a one-on-one financial wellness coach for those who wanted face-to-face interaction. Implementing all of these steps has helped the plan achieve a wellness engagement of 43%, she said.

Moroni said there’s a correlation between financial wellness and literacy, describing financial wellness as a verb, or something participants are working toward, and the latter as a noun, or something that participants should understand before they tackle wellness. While both are vital to the plan, it’s significant to know how they differ and how that impacts participants.

“Financial literacy is understanding the terms and content, but it doesn’t ensure your participants really know,” he explained. “Just because you understand it, doesn’t mean you’re doing it. Financial wellness is the actual implementation to help employees improve their financial health through overall results and getting those employees to take action.”

Wilson cautioned against the misuse of financial wellness programs, adding that they may do more harm than good if executed poorly. “These programs need to be easy for people to interact with,” she said. “If we are asking employees to sit down for 30 minutes or more and input all off their cash flow, money, etc., they won’t do that. You need to find a way to pull that info in through aggregation or just making it simple.”

She continued, “We have to prioritize that spend for people, or else they just tune us out.”

The panelists also discussed the importance of explaining health savings accounts (HSAs) to participants. Moroni contended that most individuals do not consider health care expenses throughout retirement, when the reality is that it will be a major need throughout those post-career years. “This year, the average expected cost was $300,000 [in health care expenses] for a couple at age 65,” he said.

Adding an HSA to a plan can increase health care savings now and in retirement, Moroni said, even though high-deductible health plans (HDHPs), which are required to have an HSA, might have higher costs than other health care selections.

“If you have access to an HSA, you can utilize that account to pay for health care expenses in retirement,” he said. “One thing individuals should do when they are offered the opportunity to have an HSA, they want to evaluate the premiums because the premium for an HDHP may be lower even if the deductible is higher, so that may be a savings value.”