Why HSAs Are an Underutilized Retirement Vehicle

Lorna Sabbia is managing director and head of retirement and personal wealth solutions for Bank of America Merrill Lynch. She recently shared her perspectives on how employers can help employees prepare for retirement, including her take on the high medical costs retirees face even when covered by Medicare. Highlights of that conversation follow.

Employee Benefit News: In talking to plan sponsors, do you perceive that they generally understand the financial educational needs of their employees?

Lorna Sabbia: I have a lot of great friends who are incredibly talented who work in other industries. Despite their talent, I’m often surprised by how little they know about some very basic financial topics, like managing debt, budgeting, the impact of inflation, compound interest and similar subjects. My point is those of us who are focused on benefits and retirement planning sometimes just want to jump right into that topic without laying the foundation of a more basic education in the fundamentals of personal finance.

EBN: When are employees most receptive to financial education?

Sabbia: That depends on what’s happening in their lives at any given time. While you need a strong communications framework around financial education and financial wellness, it’s equally important to have an on-demand education delivery mechanism. Individuals become interested when they have a need at that nanosecond. Some certainly enjoy the opportunity to become educated on a broad variety of topics over time, but when it becomes important, it’s because something has happened in their life, and therefore they’re reaching out for a specific topic.

EBN: How do you do that?

Sabbia: It has to be a combination of online tools — interactive sites that are pretty intuitive for folks to become better educated. For example, we built apps, which we want to be fun to use, around topics like inflation. More broadly, we think it’s important to help employees overcome emotional barriers both to learn and to make decisions. Automation can help with that.

EBN: I know you’ve focused quite a bit on health expenses in retirement and HSAs. Are HSAs underutilized as a form of retirement savings vehicle?

Sabbia: Yes. When you talk to employees and employers, you can see that health and health savings are key areas of concern. When you think about living expenses in retirement, healthcare is a wildcard, and people are concerned about it. What we try to do, in partnerships with outside subject matter experts, is to bring ideas like longevity and its health-expense implications to the table. Employers often say, “Yep, that’s something we think our employee base would benefit from.”

EBN: Are employers and employees thinking about HSAs as a retirement vehicle?

Sabbia: I think we’re on the front end of having employees really understand what the vehicle can do over time. It’s similar to back in the ‘90s when 529 college savings accounts were beginning to be introduced and eventually really took off. Today, with HSAs, folks are still trying to understand what they are and what they’re not. This is a topic that needs to be incorporated into the overall employee education about finances and retirement.

EBN: When an employer puts an HSA in place, should the message to employees be to contribute as much as they can, regardless of what they’re doing with their 401(k)?

Sabbia: I think we would always suggest that you max out on their 401(k)s, and to the extent that you can contribute to your HSA as well. But the “triple tax free” tax benefits of HSAs help to motivate employees to take advantage of them. We have a “health care discovery app” that deals with what Medicare covers, with dental, vision and long-term care, and cost estimates under different scenarios. It’s the most popular app that we have, even more than Social Security and lifetime income, in employee interest.

EBN: Most people with access to an HSA spend most if not all of the balance every year. Do you expect that to change, and for more employees to see it as a longer-term savings and investment vehicle?

Sabbia: The more education that happens, I do believe the balances over time are going to increase. One estimate I’ve seen [is that] of out-of-pocket health costs for a retirement that lasts 25 years is $220,600, or $318,800 for a 30-year retirement. That gets people’s attention.

Other research I’ve looked at, based on the top 100 HSA providers, indicates that about $4 billion of the $30 billion in HSAs is in longer-term investments. I do expect that proportion will grow.

I do believe that many employees will make the maximum contributions each year when they fully appreciate the benefits — pre-tax dollars that come out tax free, both principal and earnings, even better than a Roth IRA. I believe we’ll see the same evolution that we’ve seen in the 401(k) space, as far as the growth of investment choices. For example, in our program, once an employee has $1,000 in their account in a liquid vehicle, they can make subsequent contributions into 26 different mutual funds.

EBN: The maximum employer plus employee contribution for an individual who has an HSA in conjunction with a high-deductible health plan in 2016 is $3,350, and $6,750. Those aren’t big numbers.

Sabbia: Well, the limits are inflation-adjusted, but we also support the idea that they should be raised more over time. Even so, it’s a great way to save, particularly with all three tax benefits. We do make a major effort with education so that employees know the purposes and time horizons for different asset classes. You can pool diversified portfolios for long-term savings in those types of platforms.

 

Reprinted from EMPLOYEE BENEFIT NEWS 

10 Attributes of a Retirement-Ready 401(K) Plan

As a 401(k) plan sponsor you have no doubt embraced the concepts of retirement readiness. A significant part of helping employees achieve retirement readiness is providing a 401(k) plan with features that guide participants down the path to retirement readiness.

The following 401(k) plan attributes are generally felt to promote employee retirement readiness:

Plan Design

1. Auto-enrollment. Automatic enrollment of all new participants at a default contribution percentage of at least 3%.

2. Auto-escalation. An increase in participant contribution percentages of 1% per year, typically up to a maximum of 10%.

3. Auto re-enrollment. Automatic enrollment each year of any participant who opts out of initial enrollment at their time of hire or who stops contributing during the year.

4. Hardship withdrawal provisions for loans. In an effort to plug leakage, requirement of hardship withdrawal criteria in order to take a participant loan.

Contributions

5. Roth 401(k) availability. Participant ability to elect to make after-tax Roth 401(k) contributions.

6. Extended employer match. An employer match spread over a larger percentage of employee contributions. For example, 25% of the first 12% rather than the standard 50% of the first 6%.

7. Catch-up contributions. For those participants age 50 and older, the opportunity to make additional 401(k) catch-up contributions.

Investments

8. Availability of index funds. For those participants who believe that passive investment is the only way to go.

9. Right number of fund choices. More is not better with regard to fund choice. More is confusing. Most experts feel that the right number of funds is generally around 12 (not including target date fund options).

10. Availability of target date funds. Professionally managed target date funds for those participants who prefer to have someone else manage their account.

How many of these retirement ready features does your 401(k) plan have?

About the Author:

Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm. Reprinted from Employee Benefit News

Rules for Retirement: Plan Fees Have Companies Scrambling to Comply

Despite the dizzying array of new fee rules that 401(k) plan administrators and companies providing services to those plans must implement this year, Debbie Hoover says her small manufacturing company is ready for them.

Hoover, director of human resources for Los Angeles-based industrial paint maker Ellis Paint, says that although she initially was overwhelmed by the new wave of regulations, her retirement plan administrator, Fidelity Investments, coached her on the changes and new responsibilities.

Ellis, with 150 employees, decided that Fidelity would do the detail work and would later explain it to its plan participants.

“I was concerned about how we were going to do this when the regulations first went through,” Hoover says about the double dose of rules governing fees charged to retirement plans like 401(k)s. The regulations, which were issued by the Labor Department in several phases, all must be implemented this year. “As a small company, having Fidelity handle it seemed to be the most efficient way to do this.”

The rules are the Labor Department’s two-step way of making sure that plan sponsors such as Ellis Paint know how much providers like record keepers, money managers and plan administrators are charging to service 401(k) plans. Another regulation, which was finalized in October 2010 but goes into effect this summer, requires plan sponsors to tell participants about these fees and how they affect their account balances.

Even though the first regulation

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has providers like Fidelity doing a lot of work, companies shoulder a lot of responsibilities too. Experts say larger plans are ready for the change, but many midsize and small companies are trying to establish deadlines for information and the actions they should to take once it’s assembled.

“The challenge for many plans is following the process,” says David Wray, president of the Plan Sponsor Council of America, formerly the Profit Sharing/401k Council of America. “That means going through and making sure [plan sponsors] can assemble all the information so it can be benchmarked.”

The requirements can be confusing, says Sam Henson, senior ERISA counsel for Lockton Retirement Services in Kansas City, Missouri. To help plan sponsors through the process, Lockton created a checklist to make sure plan sponsors are reaching the right service providers before deadlines for information hit.

“Lots of plan sponsors are scrambling to make sure they are doing this,” Henson says. “The intent of the rule is great. The [Department of Labor] wants to make sure plan sponsors are getting what they are paying for, but in order to get there, the DOL has put a tremendous burden on them.”

Plan sponsors should be contacting all service providers that charge the plan at least $1,000 or more annually. By May 1, plan sponsors had to figure out whether fees are reasonable, Henson says. If providers haven’t given the information by July 1, plan sponsors should issue a written request. If providers haven’t complied by Nov. 1, plan sponsors should notify the Labor Department.

Plan sponsors need the provider fee information so they can give participants data on fees. This regulation comes in two waves: the first requiring plan sponsors to give participants plan and investment information due Aug. 30, and the second delivering quarterly information on fees and services to participants’ individual accounts, due Nov. 14.

The key to the process is documentation, experts agree. It’s important the plan sponsor have a paper trail to show the Labor Department, Henson says.

“You’ve got to have a really detailed file to show you tried to comply with the rules to the best of your ability,” Henson says. “That’s the way the DOL does everything.”

The penalty for not complying is draconian, says Marcia Wagner, owner of Boston-based Wagner Law Group. If a provider doesn’t give the plan sponsor the necessary information, or if fees are found unreasonable, the plan sponsor must fire the provider.

Plan sponsors ignoring these outcomes could be sued by participants and the Labor Department as well as face a 15 percent excise tax and other penalties, she says.

“You don’t want to mess with this law,” Wagner says. “The Labor Department isn’t playing around with this.”

About the Author:

Patty Kujawa is a freelance writer based in Milwaukee. Reprinted from Workforce Management

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