Data and Research August 22, 2023

With ‘Rothification’ of Retirement Savings, Vanguard Stresses Education

Vanguard’s retirement head discusses SECURE 2.0’s Roth provisions and the need for plan sponsor communication to participants.

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The “Rothification” of retirement savings will gain steam in 2024, as the SECURE 2.0 Act of 2022 mandated Roth catch-up contributions for those over the age of 50 who make more than $145,000 a year is scheduled to go into effect.

But implementation, while mandatory, will still need consultation and education for plan sponsors to understand—and communicate—the potential benefit of post-tax Roth saving to participants, according to David Stinnett, a principal in strategic retirement consulting at the Vanguard Group.

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“There are advantages to using a Roth, but we need to continue to educate participants on those advantages, depending on their personal situation,” Stinnett says.

SECURE 2.0 has multiple provisions that boost Roth 401(k) and individual retirement account savings, which are funded with post-tax income. Those include the 2024 mandatory Roth catch-up for high-income earners; a Roth option for employer matching contributions if the contributions are fully vested; and, also beginning in 2024, participants with Roth accounts are no longer subject to pre-death required minimum distributions.

As of the end of 2022, 80% of plan sponsors were already offering Roth contributions, according to Vanguard commentary published in July. Meanwhile, 17% of participants contribute to Roth accounts, a significant jump from 2018, when just 11% were contributing to the savings vehicle, according to the researchers.

Retirement industry groups have been lobbying for more time for Roth regulations to take hold, noting the recordkeeping and administrative issues that arise from both making Roth contributions available and sorting out payroll processing with the $145,000 threshold in mind.

Stinnett says the plan sponsors his team works with are prepared to implement Roth options, but the bigger push is around education and communication.

“Our role now is to discuss the benefits for participants,” he says. “There are a number of tax benefits that can come from Roth savings, but it will depend on the individual.”

Vanguard’s report noted that having a sizable Roth balance can provide tax diversification and lower overall tax liability by reducing the need to draw down taxable accounts such as 401(k) and traditional IRA savings accounts.

The authors also noted, however, that Roth options are not the best solutions for every saver. Some plan participants may benefit from pre-tax accounts, including those whose income and tax rate are both likely to be reduced in retirement or who have only temporary high income.

Whatever a participant’s situation for participants, plan sponsors should be providing targeted communications about Roth options to their employees, Vanguard noted.

“Once the Roth option has been added to a plan, sponsors should consider how to educate participants about the benefits of Roth contributions,” the report’s authors wrote. “Given the tax intricacies of Roth accounts, some participants find them difficult to fully comprehend. Because of this, a targeted, long-term approach to communication often works best.”

Beyond Roth options, Stinnett sees further benefits for participants coming out of SECURE 2.0 to improve overall financial well-being.

Stinnett notes that emergency savings programs are already available to participants and can be a good vehicle to prevent savers from taking plan loans or outright withdrawals. Further integration will depend on plan sponsors and their advisers being more deliberate in adding emergency programs to plan design, he says.

Meanwhile, student loan matching has potential to further help participants and is a subject of discussion with plan sponsor clients, Stinnett says. But getting recordkeepers and plan sponsors to put in place the processes necessary to administer such a benefit will take time.

“SECURE 2.0 came with a lot of excitement and brought good ideas to the table,” he said. “Implementation, as with most legislation, will take time.”

Benefits August 22, 2023

Employer Health Care Costs Expected to Climb in 2024

Employers will pay more than $15,000 per employee to provide health benefits in 2024, Aon projects.

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Without implementing any employee cost-sharing increases or other cost-saving strategies, employers should expect major health care cost increases in 2024, according to Aon. 

Average costs for U.S. employers that pay for their employees’ health care will increase 8.5% to more than $15,000 per employee, the firm predicted. 

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Such an increase would nearly double the 4.5% rise in health care budgets that employers experienced from 2022 to 2023. On average, Aon estimated that the budgeted health care plan cost for employers this year is $13,906 per employee. 

Aon uses its Health Value Initiative database, which captures information from more than 800 U.S. employers representing approximately 5.6 million employees and $77 billion in 2023 health care spending, to track this data.  

Mercer had previously found that per-employee health benefit costs topped $15,000 in 2022, with smaller employers—those with fewer than 500 employees—spending more per capita than large employers.  

These rising health care costs and budgets have the potential to eat into employer budgets for other benefits that employers offer, including financial wellness, student loan benefits, retirement contributions and more, panelists at the PLANSPONSOR National Conference discussed in June.  

Rising Drug Costs 

Debbie Ashford, Aon’s North American chief actuary for health solutions, said in a press release that even though inflation is subsiding, the cost of health care is still growing, as medical providers push insurers for larger cost increases to cover the higher costs of wages and supplies they endured during the past few years but were unable to pass on to payers. 

“Other contributing factors adding pressure on health care cost trends are the proliferation of newly indicated weight-loss drugs, new technologies, [the] severity of catastrophic claims and increasing share of specialty drugs,” Ashford stated. 

According to the Business Group on Health—a nonprofit organization that represents large employers’ perspective on optimizing workforce strategy through various health, benefits and well-being solutions—pharmacy costs continue to affect trends and affordability.  

The organization’s 2024 Large Employer Health Care Strategy Survey, which gathered data from 152 large employers between June 1 and July 18, found that 91% of employers reported concerns about pharmacy costs. This comes as employers experienced an increase in the median percentage of health care dollars spent on pharmacy, to 24% in 2022 from 21% in 2021.  

For 2024, employers said they planned to deploy various pharmacy management strategies, according to Business Group on Health.  

In addition, half of employers said cancer was the No. 1 driver in health care costs, and 86% said it ranked among the top three. Last year, cancer overtook musculoskeletal conditions as the top driver of large companies’ health care costs for the first time, according to the survey.  

Employers Hesitant to Shift Cost to Participants 

Because of the tight labor market, Farheen Dam, Aon’s North American health solutions leader, stated that plan sponsors are hesitant to shift significant costs to plan participants and make benefits less affordable. 

Aon’s analysis found that employees in 2023 are contributing about $4,675 for health care coverage, of which $2,682 is paid in the form of premiums from paychecks and $1,993 is paid through plan design features, such as deductibles, co-pays and co-insurance.  

While the rate of health care cost increases varies by industry, the professional services industry showed the highest average employer cost increase at 7.5% from 2022 to 2023, while the manufacturing industry had the highest average employee cost increase at 2.9%.  

The retail and wholesale industry had the lowest average change in employee contributions, dropping 0.5% from 2022 to 2023.  

To help plan sponsors manage their health care spending, Aon developed a Health Risk Navigator, which is aimed at helping employers make better decisions to “optimize reinsurance coverage, improve budget planning and implement targeted care management programs by using machine learning and risk simulation to analyze historical claims and demographic data for each individual employee.” 

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