Why Health Care?

Plan sponsors responsible for both retirement plans and health insurance programs often say the retirement plan benefit takes a back seat to the health insurance one. Therefore, as health care costs continue to escalate each year, helping a plan sponsor to budget health care offerings alongside its retirement plan has become a “necessary skill set for advisers in the retirement marketplace,” says John Ludwig, an adviser with LHD Benefit Advisors, an employee benefits consulting firm in Indianapolis. “Employers have only so much money they can spend on benefits, so advisers need to come up with strategies to help them optimize their offerings.”

With all the focus on retirement plan design and participant outcomes, understanding how much a sponsor’s health care coverage costs—and will cost with an aging work force unable to retire—can give an adviser leverage to work with the sponsor. Together, they can improve plan design to help employees retire and remove older workers from the health insurance plan, says Jim Sampson, principal with Cornerstone Retirement Advisors in Warwick, Rhode Island.

“Health care and retirement planning go hand in hand as part of the employee benefits package,” agrees Tuyen Pham, practice leader at Tutton Financial Services in Santa Ana, California. Retirement plan advisers should consider adding health care to their practices since “health care is employers’ most requested benefit,” he says. Retirement plan sponsors also like the “convenience of working with one-stop-shop advisers who can handle both their 401(k) plan and their health care offerings,” Sampson says.

However, this does not mean a retirement plan adviser must become a health insurance plan specialist. Bundling the two offerings into a single employee-benefits practice—even among multiple advisers or through strategic relationships—works out to be a differentiator and a distinct competitive advantage, Pham believes.

Will Americans be able to afford their health care needs in retirement? Nationwide estimates that, on average, a 65-year-old couple that retires this year will need $240,000 to cover medical costs throughout a 20-year retirement. Fidelity Investments’ annual survey says they would need $220,000.

Therefore, retirement plan advisers need also keep in mind that saving enough to cover health care expenses in retirement is a concern among employees—especially older ones—so they should help participants estimate these costs. TIAA-CREF’s second annual Financial Advice Survey found that 43% of retirement plan participants asked for advice about planning for medical expenses in retirement this year, up from 35% in 2012.

Likewise, research from the Deloitte Center for Financial Services, “Meeting the Retirement Challenge: New Approaches and Solutions for the Financial Services Industry,” discovered that, next to retirement, Americans’ second most important financial priority is saving enough to pay for health care costs.

This concern spikes among older workers. Among those within five years of retirement, the Deloitte survey found, 74% said saving for retirement was a concern, and 38% pointed to saving for health care. Concerns among employees between five and 15 years from retirement mirrored those of individuals on the brink of it, although the percentage was slightly lower: 69% were concerned about saving for retirement, and 33% worried about having enough saved for health care.

Advisers can help plan participants take the first step to cover these costs by supplying the calculators investment firms and recordkeepers develop to determine future health care costs. Nationwide Financial offers one such calculator, the Personalized Health Care Cost Assessment. The tool starts with the individual’s estimated life expectancy, then asks him questions about his current health, such as whether he has high blood pressure or high cholesterol. It asks whether he exercises, maintains a healthy diet or smokes, as well as about his family’s medical history. It then converts that information to a lump-sum estimate of how much he might need for medical expenses throughout his retirement, including long-term care.

The health care options sponsors offer are complex, Sampson notes, which is why it is critical for retirement plan advisers to educate employees about their options. “Health care looks like it is going down the same path that retirement plans did when they moved from DB [defined benefit] to DC [defined contribution],” he says. “We have already learned the hard way that people can’t handle these choices on their own. We have a huge knowledge gap on these health care issues,” and it is the job of the adviser to provide assistance. To meet that need and plan sponsor clients’ major concerns about health care costs, advisers are adding key health care services and educational programs to their conversations, practices and strategic partnerships.

High-Deductible Insurance Plans and HSAs

With health care premiums rising as much as 15% to 30% every year, many employers have been moving to high-deductible insurance plans with lower premiums, says Jason Kolinsky, a certified financial planner (CFP) with Kolinsky Wealth Management in Woodcliff Lake, New Jersey. “Since the passing of the health care reform in 2010, most insurance companies understand they cannot make as much money as they did before,” Kolinsky says. “Knowing their margins will be limited, they are increasing their premiums. Costs have become outrageous.”

In fact, a report Aon Hewitt released in October found that health savings accounts (HSAs) and other consumer-driven health plans (CDHPs) are growing in popularity and could surpass preferred provider organizations (PPOs) as employers’ most common type of health care offering in the next three to five years. The Aon Hewitt survey, conducted among 800 employers and covering more than 7 million employees, found that 56% of employers currently offer CDHPs as a plan choice, and another 30% are considering offering one in the next three to five years.

Kolinsky recommends that his clients pair these high-deductible insurance plans with health savings accounts. HSAs are used in conjunction with high-deductible health insurance policies and allow users to save money tax-free against medical expenses. This year, participants have been permitted to save up to $3,250 in an HSA for individuals and $6,450 in an HSA for families. In 2014, those limits will rise to $3,300 and $6,500, respectively.

“I absolutely recommend health savings accounts,” Kolinsky says. “Employees should take advantage of them because they don’t have to spend the money in that year, so there is no ‘use it or lose it’ [rule] as there is in a flexible spending account [FSA]. Plus, the participants can invest that money, it’s tax deferred and, when drawn down for medical expenses, it’s tax free.”

Further, Kolinsky says, HSAs are portable and employees can retain the money when they leave a job. “Once you have an HSA set up, it is yours forever, no matter where you work. If your new employer doesn’t have an HSA, you can’t contribute to the account, but it is still yours.”

Wellness Programs

Retirement plan sponsors have also begun asking advisers to include health wellness education programs in their benefits programs, as a way to reduce costs, Kolinsky says. “Plan sponsors are aware that, when they renew their health care plan, it is based on claims history, so plan sponsors are asking for advisers to contract with benefits brokers or other third-party consultants to conduct preventative wellness programs.” These programs cover a wide range of topics, such as smoking, weight control, diet, exercise, blood pressure, cholesterol, flu shots and even an overall health risk assessment.

Not only do wellness programs give advisers or benefits brokers ammunition to negotiate lower premiums with insurer carriers, Kolinsky notes, but down the road, they directly result in fewer claims—and, therefore, lower health care costs.

Voluntary Benefits

Many plan sponsors also now offer employees voluntary health care benefits to cover a variety of medical needs, such as vision, dental, life and short-term disability insurance, Kolinsky says. While his major role continues to be retirement plan consultant, in recent years Kolinsky  has added these voluntary offerings to his practice. Employers want to be sure their employee benefits stay competitive enough to attract the best talent, he notes.

“Sponsors are looking for benefits that will not cost the company a lot of money but that can add value to employees,” Ludwig agrees. “All of these benefits are important for employers to have, and the majority of companies with 100-plus employees are embracing them at this stage of the game.”

In terms of priorities, employers are first concerned about health care insurance, then dental insurance, vision insurance, life insurance and, finally, accidental death and disability insurance, says Robert Calise, a principal and health care benefits practice leader with Cornerstone Retirement Advisors, also in Warwick, Rhode Island.

Long-Term Care Insurance

Advisers should also consider offering long-term care insurance (LTCI), as unforeseen health problems can pose a “very large risk to a retirement portfolio,” says Steve Cain, principal and national sales leader with LTCI Partners, an insurance wholesaler based in Lake Forest, Illinois.

Plan sponsors are increasingly interested in the insurance, particularly since many of the benefit decisionmakers are Baby Boomers aware of the damage health care problems can inflict on retirement savings and who are seeking a way to protect their assets, Cain says. The average age of those opting for long-term care insurance is 49, with a household income of $75,000 or higher. Sponsors also receive tax breaks on long-term care insurance, Cain adds.

The Affordable Care Act

Plan sponsors are keenly interested in learning about the implications the Patient Protection and Affordable Care Act (ACA) will have on their businesses. The act, which takes effect January 1, 2014, calls for state-run health insurance exchanges to offer affordable, standardized, government-regulated health care plans that will be eligible for federal subsidies and that cannot deny coverage or claims to an individual because of a pre-existing condition.

The ACA requires companies with 50 or more employees to offer affordable health care coverage to their workers, says Aida Visakay, CEO of AxisPointe, an employee benefits consulting firm in Parsippany, New Jersey. If an employer fails to offer affordable coverage, it will face an annual penalty of $2,000 per employee, and its employees will have the option of turning to the state-run exchanges for their health insurance, she says.

An impact the ACA could have on employers is that the availability of insurance through these exchanges might prompt older employees who have continued to work  simply for the sake of health care coverage to retire, Ludwig says.

The ACA requires employers to “provide minimum value coverage that includes essential health care benefits,” explains Robert Calise,  with Cornerstone Retirement Advisors. “The plan has to meet a 60% actuarial value test, which means that [it] covers 60% of the medical claims that could arise for the average patient. That is the first hurdle.”

Next is the “affordability test,” Calise says. “The employer will meet a safe harbor if each employee’s contribution doesn’t exceed 9.5% of their W2 wages.” If an employer’s health care plan meets these two requirements, employees will have no incentive to access the state-run exchanges, because they will be ineligible for the federal subsidies, he says.

Companies with fewer than 50 employees are the ones that will be most likely to drop their health care coverage and tell their employees to turn to the state-run exchanges, Calise says. However, he does not expect that, from a competitive standpoint, many employers will discontinue coverage.