Retirement Plans

Retiree Health Costs Demand Financial Wellness

Employees can save money to pay for health care in retirement through health savings accounts, but they also need to be financially sound overall.
Kevin CrainJune 30, 2017
Retiree Health Costs Demand Financial Wellness

The escalating cost of health care continues to be a top financial concern among employees — and there’s plenty of indication that these rising costs are threatening employees’ retirement savings, too.

In our 2017 Bank of America Merrill Lynch Workplace Benefits Report, which surveyed more than 1,200 employees nationwide who participate in 401(k) plans, 79% of U.S. employees indicated they have experienced an increase in health care costs over the past two years. More than half of those employees are contributing less to their financial goals as a result.

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One avenue available to companies for mitigating this problem is to offer employees the opportunity to contribute to a health savings account.

Health savings accounts (HSAs) are one of the fastest-growing benefits in the workplace — and, as employers increasingly connect HSAs with 401(k) programs, they may help increase employees’ overall retirement savings.

At employers that do offer HSAs, they are available to those enrolled in a high-deductible health plan (HDHP). The accounts can help employees mitigate the stress of rising health-care costs through benefits like tax-deductible contributions and withdrawals, as well as the added ability to invest and potential to grow financial contributions tax-free over time.

Many employers initially “seed” the accounts with funds to draw employee interest. And, unlike other “use it or lose it” vehicles, HSAs are portable and controllable. That means contributions to an HSA can be used to fund qualified medical expenses, doctor’s visits, and other health-care costs not just today but through retirement.

Kevin Crain

Kevin Crain

The value of HSAs has become increasingly apparent as employers come to align them more closely with 401(k) plans, through efforts such as unified education, integrated dashboards, and similar investment menus. The result is that employees are starting to use HSAs for what they were initially designed: for long-term savings.

But shoring up one’s ability to pay for health care in retirement can’t be isolated from overall financial wellness. That is, if the latter improves, the former may as well.

Our study also found that employees are calling on their employers to take a much more active role in helping them manage financial challenges and improve their financial lives — beyond the traditional scope of employee benefits. This presents a crucial opportunity for employers to become an active, dynamic partner on employees’ path to financial wellness, both with pressing near-term concerns and with regard to building a financially secure future.

Here are some fundamental steps that employers can take to help employees build enough wealth to deal with health care costs in retirement without derailing overall retirement security in the process.

Implement Automatic Enrollment

Automatic enrollment can have a tremendous impact on employee participation in 401(k) plans — not just by boosting enrollment rates, but by increasing employees’ levels of contribution.

Through these programs, employers can automatically “opt-in” their workers to 401(k) accounts to make retirement saving a priority, while eliminating legwork on the individual’s part. Employers can also automatically increase employee contributions to 401(k) accounts in gradual increments over time, allowing them to opt-out if they so choose.

What we’re finding, though, is that when presented with the choice to bow out of these automatic increases, employees rarely do. In fact, many companies are increasing their automatic enrollment default percentages from the historically common 3% rate to initial rates as high as 4%, 5%, or even 6% — and participant opt-out is still low.

Break Down Benefits Silos

Too often, employers take a siloed approach to health-care and retirement benefits support — forfeiting opportunities to provide employees with the big-picture view they need to stay informed and empowered about their finances.

Employers can improve financial wellness and decision-making by driving more connectivity among financial programs and tools and creating more cohesive moments for financial support wherever possible.

For example, companies today are increasingly utilizing the health-care open-enrollment period as an opportunity to discuss overall “wellness” — physical as well as financial. Some companies are even encouraging employees to increase contributions to their 401(k) programs during this period.

Broaden Financial Wellness Programs

Improving financial wellness in the workplace starts with a much more holistic approach — one that looks at an employees’ full financial picture, inclusive of workplace benefits and personal finances.

Much like a 401(k) or HSA, broader financial wellness is quickly becoming a new and highly successful form of benefit companies offer to employees. Beyond traditional benefits education, this can include broader guidance and resources for developing better money habits, budgeting, paying down debt, and planning for disruptive life events — all areas that can significantly impact one’s ability to save for retirement.

These programs should also include regular check-ups where employees can discuss financial concerns, review progress toward goals, and leverage employer guidance to create a roadmap for better managing costs today while saving for the future. The most successful programs tend to provide financial education that is targeted to age or life stage and is delivered across multiple channels.

Be a Conduit to Financial Professionals

Our report found that at least 40% of employees would like their employers to take a more active role in supporting their financial lives. And, nearly half would feel inspired to take a more active role in managing their own financial lives if they had access to a personalized action plan.

This underscores that beyond in-house wellness offerings, employers have a crucial role to play in facilitating access to outside financial professionals who can provide one-on-one guidance and holistic support in creating a financial strategy — a desire shared among employees of all ages.

For instance, companies might host in-person working sessions with financial specialists, who can amplify employer programs with big-picture strategies for managing health-care costs and retirement savings that are action-oriented and personalized.

Outside the company’s doors, employers can also proactively direct workers to trusted financial professionals as needed, as well as ease the process for seeking them out — such as through detailed background materials that help employees find and contact someone best suited for their needs.

Incorporate Tangible Incentives

Employers can also fuel financial wellness among their employees by offering specific rewards and incentives for meeting certain goals. By providing employees with small, concrete milestones to work toward, tangible incentives can be highly successful in breaking negative habits and motivating positive long-term changes in financial behavior.

For example, an employer might consider granting an employee an increased company match for their 401(k) in return for progressing on a personal finance goal, whether it be paying down a credit card bill in full or boosting contributions to a personal savings account.

Taken together, the above strategies can help companies arm employees with the financial guidance, education and confidence they need to mitigate the impacts of rising health care costs while staying on course toward a financially secure and fulfilling retirement. The process starts with employers reconsidering their role as a benefits provider, transitioning to more modern-day financial wellness partner helping to better the financial lives of their employees.

Kevin Crain is the head of workplace financial solutions for Bank of America Merrill Lynch. In this role, he also serves as executive lead for retirement legislative and public policy.

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