If he were to work until age 70, Social Security could then cover up to 54% of his income, leaving just 21% of his income to be replaced. For years, retirement planning professionals have pushed people to save, save, save! However, the Affordable Care Act (ACA) and the increasing popularity of high-deductible health plans (HDHPs) accompanied by health savings accounts (HSAs) have created a bit of a conundrum for people as to how best to take advantage of their employer sponsored benefits, such as a 401(K).
Connecting the Dots
When compared to flexible spending accounts (FSAs), HSAs have been a great alternative to cover healthcare costs. Putting the buying power in the hands of the healthcare consumer has had a positive effect on plan experience. However, one of the unintended consequences of HSAs is that plan participants are now being forced to make tough decisions about where their money should be saved.
As a Plan Advisor, this came to light for me when I was working with a client that I share with our Group Benefits division. Concurrently, we were rolling out changes to the client’s retirement plan and health benefits plan. The retirement plan was changing providers, so the employees experienced very few changes aside from reduced fees. We were expecting nothing but positive feedback. The Group Benefits Team, on the other hand, was introducing a new HDHP with an HSA. A large percentage of the employees elected to move to the HDHP. We spent the next three days conducting meetings for the client, both in a group setting and in one-on-ones. It suddenly became clear that what we thought would be a simple transition was actually going to be much more challenging. I was continually asked, “Should I save my money in the HSA or 401(k)?”
We had unintentionally asked people to make a decision they had never thought about before.
This had me wondering how many times employees sat through open enrollment presentations, listening to the perks of HDHPs and placing funds in an HSA, only to then sit through a retirement plan education meeting where they heard how important it is to save more in retirement accounts. Plan participants have been inadvertently left to determine the greater of two solid planning options because far too often these planning discussions have lived in separate silos.
Why the Divide?
Healthcare benefits and retirement plans have existed in separate discussion spaces for a number of reasons. Up until the last five years or so, most organizations looked at their retirement plans as a necessary benefit. This was a carryover from when a 401(k) plan was a voluntary supplemental benefit to make up for what a company’s pension did not pay in retirement. And while companies often contribute a match, most matches are in the neighborhood of 50% of pay up to 6% (the employee puts away 6%, the company gives them 3%).
Fast forward to today and companies are beginning to realize that they actually want their employees to retire due to the rising costs of an aging workforce. This has led to an increase in auto-enrollments and auto-escalations, as well as committees focusing more on the results of the plan and less on the investments. All of this has put employees in the position to ask themselves, “Where should I save my money – in my 401(k) or in my HSA?”
The Bigger Picture
Benefit providers need to stop thinking about health benefits and retirement plans as separate components and begin to gauge how they can best work together. This is especially true when looking toward a future with an older workforce and rising healthcare costs for those employees.
We began running numbers on the costs of an aging workforce by first considering what benefit and wage costs would be if employees were in a position to retire at age 65 versus a later retirement. We then looked at the plan and estimated what percentage of the employees would be on track to retire and projected different ages starting with 62 and going to age 70. We used the data on current wages and healthcare costs to determine what the hard dollars would be and what savings could be earned if retirement results improved.
All of this data provides a way to reasonably project the cost of healthcare for an organization’s aging population and determine if plan design changes could positively impact those numbers long term. Not only could this help solve rising healthcare costs, it could also help curb workers’ compensation claims and eliminate advancement obstacles for younger employees.
Consider It All
Whether you are an employer or an employee, both parties can benefit from a combined review of benefit offerings so that more informed decisions can be made as to where dollars should be invested. Consider the scenario at the beginning the article. If the 55-year-old employee making $50,000 is strictly considering retirement plan information, he would likely be encouraged to save as much as possible in his 401(k) plan. However, reviewing the same scenario in a holistic manner that includes consideration for the greatest financial risk to this person (not having enough to retire versus significant healthcare costs), it may make sense for this person to contribute to the 401(k) to get the match and then max out their HSA before contributing more to the 401(k). Getting a bird’s eye view of company benefits can equip plan sponsors and employees with the information needed to make prudent financial decisions.
This article was originally published in the 2016 SilverLink Issue 3. Pat Fay is a Retirement Plan Advisor Representative with SilverStone Asset Management, 401(k) & 403(b) Advisory services are offered through our affiliate company, SilverStone Asset Management. Visit SilverStoneAssetManagement.com.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through SilverStone Asset Management. SilverStone Asset Management and SilverStone Group are independently owned and are not under common ownership with M Holdings Securities, Inc.
This information is provided for educational purposes only and should not be construed as advice. You should discuss your situation with a financial professional before making any decisions.
This article originally appeared in the Winter 2016 issue of the SilverLink magazine, under the title “HSA or 401(K)? Making the Most of Your Savings Options” To receive a complimentary subscription to the SilverLink magazine, sign up here.