Convergence of retirement and benefits is just beginning

What companies spend on health insurance, retirement plans and other benefit programs all impact their bottom line. Yet until recently, those different benefits were viewed as existing on their own. In recent years, benefits consultants and retirement plan advisors have talked up the idea of convergence.

Companies only have a finite number of dollars to spend on benefits. Could they be spending them more efficiently if those decisions are made in coordination?

“Retirement decisions are made by the retirement committee, health insurance decisions are made by HR,” says Jeff Faber, chief strategy officer, central region at Hub International. “What we’re trying to do is get everyone acclimated to the full view. How do these things align with the bottom line?”

Hub, which has 240,000 corporate clients, has been acquiring retirement practices at a regular clip.

A changing workforce

As with many things, the current push toward convergence can be attributed to COVID. The pandemic laid bare many of the economic challenges faced by employees. More companies now realize they need to consider the different aspects of what workers are struggling with in a holistic way in order to keep their businesses humming, says Stephanie Pronk, senior vice president, national health transformation team leader at Aon.

“The emotional toll that the pandemic has taken on everyone, people are looking at this very differently, especially from a business continuity and resilience perspective,” Pronk says. “The majority of businesses saw the connection of people and performance.”

With workers relegated to home offices, the veneer of separation between personal challenges and workplace ones were gone. Yet many businesses, though they may want to provide a holistic benefits experience to employees, haven’t yet figured out how to do so.

In fact, according to Aon’s 2021 Total Rewards Strategy Survey of Employers, 75% of employees said they want more choice and control over how benefit dollars are spent.

Technology can pave the way

With the evolution of technological innovations, companies are better able to deliver on the promise of convergence by being able to pull together data from different employee benefits to inform participant decisions. For example, employees can receive advice on funding emergency savings before they start on their retirement account.

“Technology has finally caught up to create quality employee experiences,” says Faber.  In the past, financial apps did little more than provide account balances. Now they’re able to cull an employee’s information across their benefits to make targeted recommendations, such as increasing retirement contributions and automating escalations.

Robust technology also fuels decision-making on the employer side, says Nate White, senior vice president of wealth and health at OneDigital Retirement + Wealth, a company that acts as the connector between different employee benefits. It enables firms to deliver a holistic experience to their employees because they’re able to analyze the data around their benefits spending and utilization.

“We’re trying to create a different discussion around how employers are spending their benefit dollars,” says White. OneDigital, an insurance broker based in Atlanta, has been scooping up retirement plans at a furious pace in the past year through its investment arm, OneDigital Investment Advisors.

The business argument

For retirement advisors and benefits consultants who are pushing this view, the main argument boils down to money. Companies could be saving money by looking at their compensation packages holistically. What happens on one side, retirement for example, impacts how much companies spend on the other side. Without the holistic approach, however, firms don’t have this visibility.

“For every person on your factory floor who hasn’t saved enough for retirement, it might cost you $30k-50k a year more for that employee,” says Sean Bjork, president of Bjork Asset Management in Northbrook, Ill., whose firm does both benefits consulting and retirement plan advising and counts among his clients a number of manufacturing firms.

Between absenteeism, lost productivity, higher health care costs and higher salaries, older employees can cost a company more. But employees stay on the job longer if they don’t have adequate retirement savings.

“We target that number to say, ‘This is the present value of your unfunded future penalties,’” says Faber. Employers can then take the figure and decide which benefits programs have the best chance of reducing those future liabilities and allocation a portion of the savings to them.

Still, getting an accurate calculation of return on investment in a holistic approach isn’t easy. According to Aon’s survey, for example, just 24% of employers have a good sense of the return on total rewards spending based on quantitative measures and only half even measure the effectiveness of total rewards.

One place to start is by quantifying the cost of late retirement. Companies can reallocate part of the potential savings they would achieve if more of their workforce retired on time into programs that improve retirement readiness. For some, that might mean a higher company match, one-on-one advice or a more robust financial wellness program, Faber says.

HSAs can fill the void

One area that proponents of convergence are excited about is health savings accounts and the role they can play to both handle medical costs and retirement readiness. HSAs are sometimes called “triple tax-free.” Contributions into the accounts are tax-free, the money grows on a tax-free basis and withdrawals, and as long as funds are used for qualifying medical expenses, are also tax-free.

What’s more, people over the age of 65 can use the money without tax penalty, for any purpose.

HSAs are used with high-deductible health insurance plans, which help to keep corporate health expenses down. These funds are often paired with investment accounts that can help the money grow even more.

“The HSA is the exact product that sits at the intersection of health and wealth,” says Bjork.

But for now, HSAs seem to be stuck in the health insurance silo. These accounts are typically the domain of the HR department, which promotes them as a way to pay for medical bills, in a similar vein to a flexible spending account. According to Lively, an HSA provider, which sampled 25,000 of its users, 86% of funds in an HSA are used for medical expenses.

However, if benefits were to be viewed in totality, says Bjork, HSAs would be optimized for both healthcare spending and retirement savings. Companies would pay more attention to the investment vehicles they chose to pair them with and they could be seen as a way to supplement retirement savings.

Obstacles still remain

But as much as the idea of convergence of retirement and benefits are talked about, it’s hard to call it a groundswell. Bjork’s firm, for example, does benefits consulting for 150 companies and advises on 50 retirement plans, but there is only 10% overlap.

“If we’re hired as the 401(k) advisor, our committees very much want us to stay in our lane,” he says.

Another concern is that an insurance company, for example, may only populate a retirement fund with its own investment choices or those for which brokers might receive a commission. Convergence doesn’t necessarily mean one all-in solution from the same provider.

In many cases, the human resources department itself acts as the bridge between different benefits.

“The employers that have strong HR departments are less concerned about the silos because they have staff that knows how it works and can manage it appropriately,” says Manuel Rosado, president and partner of Spectrum Investor Advisors in Mequon, Wisconsin.

Regulatory constraints also stymie true integration since health insurance and financial services have different compliance requirements.

As more companies move toward convergence, they will need guidance on which programs and benefits to bring into the fold, observers say. Retirement plan advisors and consultants can expand their roles by helping companies move beyond the silos. Today’s tight labor market gives the task greater urgency.

“Firms that ignore the convergence of retirement, wealth and health are putting themselves in a difficult position,” says OneDigital’s White.