Plan sponsors need to rethink their approach not just to retirement savings plans but health savings accounts (HSAs) as well—and not just the design of the former, but promotion of the latter to employees as a supplementary means of retirement savings.
That's according to a Society for Human Research Management report, which points out that when presented separately, as the two accounts generally are, they leave employees in ignorance about how effective they can be to boost retirement savings when used in tandem.
In the report, Kevin Mahoney, senior institutional consultant at The Mahoney Group of Raymond James, says, "Increasing numbers of employees are postponing retirement, many driven by financial necessity," and urges employers to consider a new approach to both accounts.
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In a session at the SHRM 2017 Annual Conference & Exposition, Mahoney is quoted saying that although older workers who love their jobs tend to be engaged and productive, "those who are still working solely because they can't afford to retire tend to be less healthy, highly stressed and disengaged from their jobs. The ones who don't want to be there are the ones you don't want to keep."
Employees—in particular young employees who could most benefit from using HSAs—are not well informed on the triple tax benefits of such accounts, nor do they necessarily know that they can invest HSA balances and let the money grow much as they would in a 401(k).
But HSAs also provide the opportunity to save today's health care receipts, paid out of pocket, and then in retirement, "withdraw HSA funds tax-free against those years-old receipts," Mahoney points out, adding that the tax advantages of HSA accounts outweigh those of 401(k)s.
Not only are employees not saving as much as they could for retirement by not using the two accounts together, Mahoney says, but employers are losing a lot of money by not encouraging them to—particularly when it comes to using auto features in 401(k)s.
"We know that automatic enrollment and annual automatic escalation to increase employees' deferral savings rates, with an opt-out option, boosts long-term savings even more than an employer-match increase, but many employers are still hesitant to incorporate auto features into their 401(k) plans," Mahoney explains, and dismisses employers' fears that auto-enrollment and auto-escalation of contributions could drive up their matching contribution costs.
Even if employers can't tweak the match formula to keep their expenses down, Mahoney says, "in the long run, employers still save money" because employees who can't afford to retire drive up other costs considerably higher than what the extra match spending would cost.
A MassMutual study indicates that annual health care costs for a new hire at age 38 could be $4,870 per year, while health care for a 65-year-old could be $11,219.
Add to that the "considerably higher" workers' comp costs for older workers and the higher wages usually paid to a 60-year-old employee compared to what a 20- or 30-year-old makes, and the difference in expense points to plan modification.
Workers who "aren't healthy and aren't productive are costing you lots of money," Mahoney says in the report, adding, "When employers tell me they can't afford the added match dollars related to auto-enroll and auto-escalation, my response is, 'Really? You can't afford not to do this.'"
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