How Integrated Benefits Optimization Can Benefit Employers & Employees

Transcription

1 Integrated Benefits Optiization A Perspective Partners White Paper How Integrated Benefits Optiization Can Benefit Eployers & Eployees

2 Executive Suary Eployers and eployees soeties see to be on opposite sides of a battle over benefits: eployers are fighting rising health costs, while eployees are facing benefits that are inadequate for their long-ter retireent and healthcare needs. However, to the extent that soe of these probles are due to inefficiencies and lack of coordination in how health and retireent benefits are delivered, a win-win solution for eployers and eployees is possible by iproving the coordination of benefits delivery. An exaple can be seen in the experience of XYZ Corp.* (a pseudony for the actual copany), which ipleented NestUp Managed Deferrals, a coordinated and autoated approach to health and retireent benefits delivery. After just one enrollent cycle, exaples of the win-win for eployer and eployees can already be seen: Participation rates in both 401(k) and health savings accounts (HSAs) have increased. Deferral rates in both 401(k) and HSA accounts have increased. Greater HSA participation and savings should facilitate increased high deductible healthcare plan engageent. Participants are beginning to allocate HSA dollars to long-ter investents, in recognition of long-ter health needs and the potential for greater tax benefits. This, along with greater deferral and participation rates for both plans, should enhance the retireent readiness of the eployee base. More payroll dollars are being shielded fro FICA tax due to increased HSA participation. Notably, the ipleented approach is user-friendly and highly-autoated, and can be ipleented using existing 401(k) investent and healthcare plan options. Therefore, the results of better health and retireent benefits coordination can be achieved with inial disruption or adinistrative burden. * XYZ Corp. is a pseudony for a copany based in Fairport, New York. XYZ Corp. and Perspective Partners operate independently of each other but do have an affiliation due to coon ownership. 1

3 Table of Contents Executive Suary Page 1 Introduction Page 3 Current State of Health and Retireent Benefits Delivery Page 4 Analysis of Inefficiencies and Their Ipact Page 5 Coponents of a Solution Page 7 Case Study: Debut of NestUp Managed Deferrals Page 9 Conclusion Page 11 Sources Page 12 2

4 Coordination between health and retireent benefits delivery can squeeze out soe of the inefficiencies of this syste, aking possible ore of a win-win for eployers and eployees,... Introduction Eployee benefits delivery in the United States is not working to the satisfaction of eployers or their eployees. For years, eployers have grappled with rising costs, while their eployees have received increasingly inadequate benefits. CONTACT US Perspective Partners 290 Woodcliff Drive Fairport, NY x428 TOLL FREE FAX A notable aspect of the proble is that healthcare and retireent benefits have traditionally been delivered through separate systes, positioned as having copletely unrelated objectives. In reality, health and retireent benefits are inextricably linked, both because they represent hard choices ade by plan participants about how to allocate their benefit dollars, and because healthcare expenses are likely to represent a significant portion of retireent spending 1. Coordination between health and retireent benefits delivery can squeeze out soe of the inefficiencies of this syste, aking possible ore of a win-win for eployers and eployees. For exaple, right-sizing benefits such as healthcare for eployees personal situations can result in better cost anageent, and optiized savings strategies can iprove retireent outcoes. This paper will describe the potential for iproveent that such coordination represents and how it ight be achieved. 3

5 Current State of Health and Retireent Benefits Delivery While it is deeply ingrained in the Aerican private-sector job arket, the syste of eployer-provided health and retireent benefits sets up an inherent conflict fro which both sides suffer: Eployers face rapidly-rising benefits costs, especially in healthcare. According to figures fro the Bureau of Labor Statistics (BLS), fro the beginning of the year 2000 through the end of 2014, edical care inflation grew at a 65 percent faster rate than consuer prices in general 2. Eployees, eanwhile, receive benefits packages that see unlikely to eet their healthcare or incoe needs in retireent. Eployees are painfully aware of this inadequacy: the Eployee Benefit Research Institute (EBRI) found that even aong Aerican eployees actively participating in a retireent plan, only 24 percent described theselves as very confident they would have enough oney to live cofortably throughout their retireent years 3. Conflict ay see inevitable given that eployers and eployees are generally on opposite sides of this cost/benefit equation, but inefficiencies in how the benefits industry is structured have contributed to the adverse results of that conflict. For one thing, health and retireent benefits are generally confined to separate silos rather than coordinated. This fails to recognize that there is an inextricable relationship between health and retireent benefits: not only are eployees typically trying to fund both with liited financial eans which deand trade-offs between the two, but also healthcare costs are likely to eat up a significant portion of incoe in retireent 4. Another inefficiency in benefits delivery is in the ethods used to educate eployees about their options. Too often this involves classroo-type sessions that are tie consuing for both those delivering and those receiving the essage. Also, this classroo approach often leaves too wide a gap between education and the eans of taking action. The result is that education efforts add to the eployer cost of benefits while often not sufficiently iproving eployee utilization of benefits. The result, as described by U.S. Treasury official J. Mark Iwry, is that Defined Contribution Plans are really undefined contribution plans, with savings levels having little relation to probable needs 5. Ironically and fortunately these structural inefficiencies are the reason a win-win solution for eployers and eployees is possible. Rather than either side benefitting at the expense of the other, both can benefit by addressing those inefficiencies and the probles created by the. Addressing inefficiencies can create ore cost control for eployers while delivering ore effective benefits for both highly-copensated and rank-and-file eployees. Meanwhile, introducing ore of a sealess approach to benefits delivery can also ease the adinistrative burden on overtaxed Huan Resources departents. A closer analysis of how these inefficiencies are costing eployers and eployees will yield insights into where the opportunities for iproveent can be found. 4

6 Integrated Benefits Optiization A Perspective Partners White Paper...This is a issed opportunity, because not only could HSAs be used to suppleent 401(k) retireent savings, but under certain circustances they ay be a ore cost-effective use of eployee benefit dollars... Analysis of Inefficiencies and Their Ipact If health and retireent benefits were truly unrelated, there ight be no detrient to having the delivered to eployees as two separate and unrelated plans. As it is, though, this lack of coordination contributes heavily to the inefficiency of benefits delivery. Significantly, health and retireent benefits are usually delivered not only by different providers, but they are thought of as having unrelated issions. Retireent plans are seen as providing long-ter incoe, while healthcare plans have historically been put in place to insure against iediate edical needs. Why is this a proble? For one thing, viewing healthcare savings solely in ters of eeting near-ter needs fails to acknowledge the fact that healthcare will likely represent a substantial portion of a person s expenses in retireent. An analysis of the 2013 Consuer Expenditures Survey by the BLS shows that while healthcare expenditures represent 5.69 percent of pre-tax incoe for consuers in general, this nuber roughly doubles to percent for people 65 and older 6. In short, in retireent healthcare expenses are not soething that can be taken in stride; they are a significant portion of the household budget. While there is the potential to use HSAs to prepare for long-ter healthcare needs, the evidence is that eployees typically use the siply to provide for near-ter expenses. The EBRI reports that the average HSA balance as of the end of 2013 was $1,766. Significantly, the average distribution fro HSAs in that sae year was $1, In other words, HSA participants see to be siply topping up their balances as needed to prepare for the year ahead, as opposed to building balances to prepare for long-ter healthcare needs. This is a issed opportunity, because not only could HSAs be used to suppleent 401(k) retireent savings, but under certain circustances they ay be a ore cost-effective use of eployee benefit dollars. Figuring out just what those circustances are i.e., when putting oney into an HSA is ore cost-effective than putting it into a 401(k) and vice versa is a soewhat involved decision. For exaple, in 401(k) plans with an eployer atch, an eployee s first deferral dollars are best used to axiize that atch. However, once the atch is axiized, it ay ake ore sense for deferral dollars to be directed toward the HSA rather than the 401(k). This is because in the long run, the tax characteristics of HSAs could ean ore spending power vs. the 401(k) for virtually all eployees. HSAs do not require iniu distributions to be ade when the participant reaches age 70 ½, and when distributions are ade they are not subject to incoe tax as long as they are used for qualified edical expenses. In general, only when HSA deferral liits are reached should the eployee s deferrals be directed back towards the 401(k) plan. 5

7 HSAs ay also offer superior value to participants in retireent because funds used for qualified edical expenses are not included in the eans testing for Medicare, while 401(k) funds are. The advantages of HSAs ay even extend beyond retireent. Inherited 401(k) balances are subject to incoe tax when withdrawn, while inherited HSA balances can reain in an HSA where they can be used tax-free by a spouse to pay edical expenses including expenses that ay have been left by the deceased account holder. Because of the coplexity of the trade-off between 401(k) and HSA deferrals, this is another area in which the lack of coordination between health and retireent benefits is daaging, because it leaves eployees with little guidance as to how to allocate their precious benefit deferrals, let alone a eans of expediting that decision. An additional proble for eployees is that because HSAs are presented as a eans of funding short-ter expenses rather than as part of a long-ter savings progra, they are typically invested exclusively in low-yielding, short-ter liquid vehicles rather than in long-ter assets appropriate for a retireent tie horizon. Often, a short-ter deposit vehicle is the only option provided for these accounts. Along with their eployees, eployers also suffer fro the lack of coordination between retireent and healthcare plans. Fear of the deductible can cause eployees to shy away fro choosing high deductible health plans (HDHPs) if they are not confident in their HSA balances. Lower-deductible plans are likely to be ore expensive for eployer and eployee alike and ay well be subject to faster-rising costs over tie because the lower deductible effectively absolves eployees fro accountability for healthcare usage. In short, a igration to HDHPs can be an iportant step in controlling eployer healthcare costs, but inadequate participation in HSAs is a barrier to that step. Under soe circustances, it ight also cost eployers to have eployees allocate dollars to 401(k) plans rather than HSAs, since 401(k) deferrals are subject to FICA payroll taxes, while HSA deferrals are not. Lastly, an additional downside to the current benefits odel is that to the extent that eployees perceive their benefits as inadequate, the eployer suffers the recruiting, retention, and orale consequences. 6

8 Integrated Benefits Optiization A Perspective Partners White Paper The Coponents of a Solution How could the probles described above be rectified? One approach would be to address the fundaental inefficiencies and their consequences with a syste that sealessly ties together retireent and healthcare benefits delivery. This would present retireent and healthcare choices to participants as a coordinated progra to eet long-ter needs, rather than as separate and unrelated savings approaches. Another eleent of a ore coordinated approach would be to ore closely link eployee education with the opportunity to take action. This type of solution would have several advantages: 1. It would allow eployees to get ore for their benefit dollars by guiding their deferrals to optiize eployer atching, while also recognizing the potential tax and other benefits of HSA plans cited in the previous section. For rank-and-file eployees, this eans allocating their benefit dollars between health and retireent plans in the ost efficient anner. For highly-copensated eployees, this eans not just recognizing the potential advantages of HSA plans, but also aking greater use of the as a long-ter suppleent to their 401(k) plans, since these eployees ight have their 401(k) deferrals liited by annual contribution liits or discriination testing. 2. Along with showing eployees how to optiize their deferrals, a coordinated education and ipleentation approach would increase overall deferrals by 7

9 presenting a clear deonstration of the cost/benefit of the alternatives available, and by aking choices ore iediately actionable. 3. A ore coordinated essage would raise awareness of the need to build long-ter health savings. The EBRI found that eployees do war up to HSAs once they have had the available for a while, but there is a lengthy learning curve involved. Only 12 percent of HSA accounts receive the axiu eployee contribution in the first year the plan is established, but this percentage builds gradually as the plan ages. For HSA accounts in existence for ten years or ore, 44 percent of accounts axiize their contributions 8. If this learning curve could be accelerated, fewer participants would iss out on several years of potential deferrals. 4. A properly coordinated health and retireent approach would include the option of investing HSA balances in long-ter investents, as a copleent to traditional short-ter liquidity vehicles. This could be facilitated by coordinating soe portion of HSA investents with 401(k) investents, including aking HSA investent options available which correspond with Qualified Default Investent Alternatives (QDIAs) on the 401(k) enu. This would accoodate the long-ter growth of balances beyond a year s deductible or expected out-of-pocket expenses. 5. More closely linking deferral choices and education with available investent options would iprove eployee follow-through. 6. Integrating health and retireent benefits delivery could help eployers control benefit costs. Priarily, this would be accoplished by enabling broader participation in HDHPs, which are ore cost-effective for both eployer and eployee. As a side benefit, in soe cases the portion of payroll exposed to eployer FICA taxes ight be reduced as a result of greater allocations to HSAs rather than 401(k) plans. 7. Properly executed, addressing inefficiencies through coordination between health and retireent benefits and between counication and action would ease the growing burden that everincreasing benefits coplexity has placed on huan resource departents, while helping those departents show easurable results fro their efforts. Ideally, the coordination of healthcare and retireent benefits would be achieved with the continued inclusion of existing investent and insurance options, to iniize disruption to participants and the counication burden on internal staff. 8

10 Integrated Benefits Optiization A Perspective Partners White Paper Case Study: Debut of NestUp Managed Deferrals During open enrollent in 2014 for the 2015 plan year, XYZ Corp., a technology copany with eployees working out of ultiple locations, ipleented a benefits coordination and education solution provided by Perspective Partners, LLC. The solution, called the NestUp Managed Deferrals progra, gave eployees an intuitive web-based interface fro which they could readily analyze and ipleent decisions concerning both their 401(k) and HSA deferrals. The NestUp Managed Deferral progra incorporates eleents which directly address the probles described in this paper. It provides a single portal through which eployees can research and anage their health and retireent benefit options. It shows participants how to allocate their available dollars between the two plans, to get the ost after-tax benefit for those dollars. Finally, it provides direct ipleentation tools for both the 401(k) and the HSA, so that participants can put their decisions into action without delay. 43% Percent of eployees increased their overall benefits deferrals 8% Percent of eployees decreased their overall benefits deferrals 9

11 After a single enrollent period, the NestUp Managed Deferrals progra has helped XYZ Corp. achieve easureable results in several of the areas described in the previous section of this paper as being coponents of iproved benefits coordination. Here are areas in which this progra has already shown results: Optiizing the allocation of deferrals. A anaged deferrals engine now shows eployees how to get the ost value for their benefit dollars by optiizing eployer atching and tax benefits. Notably, the case for optiizing deferrals was copelling enough that 401(k) and HSA options were presented side-by-side with neither cannibalizing participation or deferral rates fro the other plan. Increasing overall deferrals. Participation rates in both the HSA and 401(k) increased. 35 percent of 401(k) participants increased their deferrals. 29 percent of HSA participants increased their deferrals. Plan wide, the average deferral to both the 401(k) plan and the HSA increased. Overall, 43 percent of eployees increased their overall benefits deferrals, vs. 8 percent who decreased the. Increasing utilization of the HSA. Total HSA dollars deferred increased by 14 percent. The percentage of eployees aking the axiu allowable HSA deferral increased fro 16 percent to 22 percent. Investing HSA assets in long-ter investents. The progra introduced a enu of long-ter investent options to the HSA, coordinated with options on the 401(k) enu. This includes options corresponding with the QDIA options on the 401(k) enu. This can help eployees invest for future healthcare needs in addition to keeping oney for iediate needs liquid. The percentage of eployees allocating HSA oney to long-ter investents juped fro 0 percent to 21 percent. Iproving eployee follow-through on decisions. Increased 401(k) deferrals were especially prevalent when the progra indicated to participants that this was advisable. 60 percent of participants who received a essage suggesting this course of action followed through by increasing their deferrals, copared to just 17 percent of participants who did not receive such a suggestion. Siilarly, 47 percent of those receiving a suggestion to increase HSA deferrals followed through, copared with 14 percent of those who did not receive such a suggestion. Helping eployer anage benefits costs. Eployer payroll dollars exept fro FICA tax increased after the first enrollent cycle of the NestUp Managed Deferrals progra. Easing the adinistration burden through autoation. The online-based approach succeeded in raising plan-wide participation while allowing eployees to learn about their benefits options at their own pace, at their own convenience, and in different locations. The online progra includes answers to any frequently-asked questions, relieving the adinistrative burden of having to repeat answers to eployees who ask siilar questions. 10

12 Integrated Benefits Optiization A Perspective Partners White Paper...Better coordination of health and retireent benefits is a worthwhile pursuit for both eployers and eployees... Conclusion Thus far, the NestUp Managed Deferrals progra has been rolled out in a single pilot progra, through just one enrollent cycle. Already though, the progra has shown encouraging progress in addressing the fundaental probles described by this paper. Coordination of health and retireent savings allows benefits to be deployed ore efficiently, while the counication, planning, and ipleentation approaches of the progra have helped eployees take a step away fro the undefined contribution nature of ost retireent plans. The user-friendly autoation of the approach suggests it could readily be ipleented on a wider basis. XYZ Corp. has had high deductible plans in place and has used one of the nation s leading health account adinistrators for about four years. Yet despite a wealth of awareness and education, not one eployee had allocated HSA funds to long-ter investents. Now that eployees have NestUp Managed Deferrals to provide a strategy that can be ipleented with just a few clicks, 1 in 5 eployees are accuulating HSA funds in long-ter investents. Given all that is at stake in ters of benefits costs to eployers and the long-ter well-being of eployees, better coordination of health and retireent benefits is a goal U.S. copanies should be actively pursuing. The experience of XYZ Corp. with the NestUp Managed Deferrals progra is evidence that this pursuit can be worthwhile for eployers and eployees alike. 11

13 ENDNOTES 1. Bureau of Labor Statistics, Consuer Expenditures in 2013, February, consuer-expenditures-in-2013.pdf 2. Bureau of Labor Statistics, Consuer Price Index: All Ites, Medical Care, Retrieved March 11, Eployee Benefit Research Institute, 2014 Retireent Confidence Survey Fact Sheet #1: Retireent Confidence, March 18, RCS14.FS-1.Conf.Final.pdf 7 Eployee Benefit Research Institute, HSA Balances, Contributions, Distributions, and Other Vital Statistics A First Look at Data fro the EBRI HSA Database on the 10th Anniversary of the HSA, June index.cf?fa=ibdisp&content_id= Eployee Benefit Research Institute Notes, Maxiizing Contributions to an HSA: Findings fro the EBRI HSA Database, January, EBRI_Notes_01_Jan-15_HSAs-Debt.pdf 2015 Perspective Partners 4. Bureau of Labor Statistics, Consuer Expenditures in 2013, February, consuer-expenditures-in-2013.pdf 5. Steyer, Robert Treasury s Iwry urges ore use of behavioral research in DC plans, Pensions & Investents, Septeber 16, ONLINE/ /treasury8217s-iwryurges-ore-use-of-behavioral-researchin-dc-plans?newsletter=daily& issue= Bureau of Labor Statistics, Consuer Expenditures in 2013, February, consuer-expenditures-in-2013.pdf 12