Once upon a time, workplace-based savings accounts were focused largely on retirement. Contributions to 401(k) plans or similar employer-sponsored plans helped employees build a retirement nest egg while reducing their current tax burden. But that traditional savings model is being challenged by competing priorities for scarce dollars.
In the past, workers usually looked to their employers for affordable group health insurance coverage as an expected part of their overall compensation package and the lucky ones could sometimes count on continued coverage in retirement. But as health care costs increased, many employers have shifted some of the financial burden of health care coverage to their employees, often pairing high-deductible health insurance plans with flexible spending accounts (FSAs) or more recently, health savings accounts (HSAs).
As a result, today's employees are faced with numerous decisions about how to divvy up their paychecks into multiple savings vehicles and the portion allotted to retirement savings is suffering.
Nearly 70% of workers have experienced a rise in health care costs over the past two years directly resulting in decreased retirement savings, according to the latest Bank of America Merrill Lynch Workplace Benefits Report released Wednesday. Among those who have experienced an increase in health care expense, 77% indicated that they are saving less for retirement as a result and 23% report saving significantly less.
In response to higher medical costs, 46% of employees said they have started contributing or increased their contributions to health savings accounts and flexible spending accounts. The percentage of employees participating in HSAs grew by nearly 50% since 2013 as more employees began offering the plans.
However, many participants do not understand how these plans work. More than half of the employees in the Bank of America Merrill Lynch survey view an HSA as a short-term vehicle to cover near-term health care expenses as opposed to a long-term savings vehicle. Additionally, 55% of them usually spend their entire HSA balance within a given year.
And that's unfortunate because HSAs offer a
triple tax break: contributions are made with pre-tax dollars; assets grow tax-free; and distributions are tax-free if used for qualified medical expenses.
Unlike flexible savings accounts, HSAs do not have a use-it-or-lose-it rule and are portable. That means those who can afford to pay their medical expenses out of pocket can allow their HSA assets to continue to grow and serve as a tax-advantaged savings account for health care expenses in retirement.
And those health care expenses could be significant. A 65-year-old couple retiring today can expect to spend about $245,000 on health care throughout retirement, not including nursing home or long-term care, according to the 2015 Fidelity Retirement Health Care Costs Estimate.
"The sticker shock of $245,000 hopefully reinforces for many people that they need to act now, regardless of their age," said Brad Kimler, executive vice president of Fidelity's
Benefits Consulting Services. "For people offered a high-deductible health plan with a health savings account at work, choosing this option can really help them prepare, especially for millennials who have a long time to save."
Worries over future health care expenses topped the list of concerns for individuals and couples in retirement, according another recent survey by Voya Financial. More than 40% of respondents identified health care costs as their biggest worry in retirement.
It is no wonder that six in 10 employees in the Bank of America Merrill Lynch survey said they feel stressed about their financial futures, up from 50% in 2013.
The report, based on a nationwide survey of more than 1,200 employees with 401(k) plans at companies of all sizes, also found that 55% of respondents admit to needing help managing their finances, including saving for retirement and managing debt.
“Given how many are struggling with today's financial demands while planning for their future, employers are in a critical position to help their employees secure their financial future,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America Merrill Lynch.
It looks like the time has come for more holistic financial planning in both the workplace and as retirees turn their retirement savings over to financial advisers for guidance on how to draw down their savings. The Department of Labor's new fiduciary rule will shine a bright light on the types of investments and associated costs that advisers recommend for a retirement plan but the ability to incorporate strategies to manage health care costs is not part of the mandate. However, that is one of the areas where thoughtful advisers can really demonstrate their value.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews
and a certified financial planner.
