Products March 23, 2015

Tangible Retirement Messaging Drives Better Outcomes

When it comes to workplace retirement planning and inspiring plan participants to improve their outlook, simpler messaging is often the most effective, says Stuart Robertson of ShareBuilder 401k.
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According to Stuart Robertson, president of ShareBuilder 401k, just a $500 increase in annual savings can result in an extra $110,000 over a 40-year time horizon. Discussing the infographic and underlying savings math with PLANSPONSOR, Robertson noted that a $500 increase matches the Internal Revenue Service (IRS) deferral limit increase scheduled for plan year 2015.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $17,500 to $18,000 for the 2015 plan year. The catch-up contribution limit for employees aged 50 and over also increased $500, from $5,500 to $6,000. Effective January 1, 2015, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000 (see “Some Context Around 2015 Deferral Limit Increases”).

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ShareBuilder’s hypothetical illustration shows the impact of investing an extra $500 per year over a period of 40 years, based on an averaged 7% rate of return in a tax-deferred 401(k) account. The results include the reinvestment of all interest and assumes no distributions or other tax considerations, Robertson explained.

“The deferral limit increase seems fairly minor at first blush, along with the increase in the maximum catch up contribution, which was also $500 for 2015,” Robertson said. “But looking at the math a little closer and thinking long term, there is nothing minor about the increase or the opportunity it presents to retirement plan participants.”

As outlined in the infographic, 10 years of saving an extra $500 per year will lead to extra wealth equivalent to the price of a Caribbean vacation, or about $7,254. In 20 years, the additional $500 per year will result in extra wealth approximately equivalent to a full year’s tuition at a median range college, or about $21,832. Thirty years of this will result in enough extra wealth to cover a new luxury car, or about $51,129.

“If you are a young worker and you only recently entered the workforce, that extra $500 per year over a 40-year career brings an extra $110,000 in ending wealth,” Robertson said. “That’s dramatic, and we encourage sponsors and advisers to use our infographic to help people think about putting away something for retirement in the same way they think about saving up for a house or a car. We want to ask what they can do with each paycheck or even on an annual basis that will move them closer to the end goals.”

Robertson continued by noting relatively few savers are able to consistently hit the IRS deferral limits—especially when it comes to workplace retirement investors at the lower ends of the income scale. But this doesn’t mean the benefits of saving an extra $500 are limited to more affluent retirement savers: minor increases in recurring savings today become significant increases in wealth over long periods of time, regardless of the wealth level, and should be encouraged among all participants, he said.

“One piece of the infographic that really jumps out is the coffee cup icon, and just the note that $500 a year is equivalent to two cups of premium brewed coffee per week,” Robertson said. “It really makes you think about how much extra room there is in your budget to find an extra $500 per year, even when things are tight and you’re not the wealthiest person contributing to a 401(k).”

Robertson concluded by noting the infographic could be a helpful presentation tool to deliver alongside a bonus or merit increase. “You can use it to make the case that this extra money will do so much more if it’s directed into the tax-advantaged savings account, rather than just going into your pocket,” he said.

 More information on the firm is available at www.sharebuilder401k.com. 

Data and Research March 23, 2015

CDHP Cost Saving Not Just a One-Time Event

A study suggests CDHPs do not just cut employers’ health care costs in the first year of use.
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Health care cost growth among firms offering a consumer-directed health plan (CDHP) is significantly lower in each of the first three years after offer, according to a research paper published by the National Bureau of Economic Research.

Using data from 13 million individuals in 54 large U.S. firms, the research results suggest that—at least at large employers—the impact of CDHPs persists and is not just a one-time reduction in spending. However, researchers did find the decrease in spending may be smaller in year three compared to year one post-offer. They say the results are suggestive and consistent with a decreasing impact of CDHPs over time.

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At the firm level, the researchers find that the CDHP offer is associated with an approximately 5% reduction in total health care spending in each of the three years after CDHPs were introduced relative to cost growth observed for non-offering employers.

The decreases in total spending growth observed were primarily due to reductions in spending on outpatient care and pharmaceuticals. In contrast, by the third year there were no differences in either emergency department or inpatient spending. The researchers note that it is more difficult to obtain pricing information that allows workers to ‘shop’ for emergency department or inpatient spending.

Looking at differing CDHP design features, the researchers’ estimates are consistent with the theory that CDHPs with larger financial incentives are associated with greater and more long-lasting reductions in spending than CDHPs with smaller financial incentives. However, they say further research is needed to determine which plan design structures are most beneficial.

The researchers note their results are limited to large employers and may not extend to the small group market. In addition, they note that the findings do not address the concern that short-term decreases in spending with a CDHP is, in part, a result of workers foregoing care and will result in increases in spending in the long term.

Information about ways to obtain the report, “Do ‘Consumer-Directed’ Health Plans Bend the Cost Curve Over Time?” is here.

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