Showing Clients How to Help Participants Maximize Savings

To make it practical for defined contribution (DC) plan participants to maximize their savings opportunities, they first need to get their financial house in order.

Alvin Shaver, director of compensation and benefits at Southeastern Freight Lines Inc., a 2018 PLANSPONSOR Plan Sponsor of the Year finalist, told 2018 PLANSPONSOR National Conference (PSNC) attendees that having an emergency fund is important for participants. He noted that stats show many cannot come up with even $400 to cover an unexpected expense. “If they can’t handle that piece, it affects all other pieces. If they can’t pay bills, they cannot think about saving for retirement,” he said.

Shaver stressed that employers need to help their workers become financially literate. He said they should also work with them on decreasing debt, so those individuals have the cash flow to put money into savings vehicles.

When choosing how to save in their DC plans, Jania Stout, practice leader and co-founder of Fiduciary Plan Advisors, and winner of a 2016 Retirement Plan Adviser of the Year Award, said whether they contribute on a pre-tax or Roth after-tax basis depends on the individual. She noted that automatic enrollment most likely defaults participants to pre-tax savings, but questioned whether young people who have just entered the work force and have a lower income really need that pre-tax deduction. Depending on participant demographics, she contended, plan sponsors should encourage recordkeepers to rethink the default.

However, Kenneth M. Forsythe, assistant vice president, product strategy, at Empower Retirement, noted that plan sponsors must consider what is matched by employers—usually only pre-tax deferrals get matched.

Shaver added that using tools/calculators is important. Plan sponsors can lead participants to tools to help them decide whether pre-tax or Roth would be better.

Saving for long-term health care

Kevin Robertson, chief revenue officer at HSA Bank, said the very first thing DC plan participants should do is educate themselves, using resources from plan sponsors and providers about how much they will need for retirement, including how much for health care. He noted that estimates by groups range from about $250,000 to $500,000.

Forsythe advocated for a savings optimization model. “It’s important to give employees a very clearly defined, three-step process on what to do when [wanting] to save for retirement. First, they save enough in their DC plan to get the full match formula, then save up to the IRS maximum into a health savings account [HSA] and lastly, if they have anything, else to put it in the DC plan.”

He said Empower research found 97% of plans use a match formula up to 50% of a specified deferral amount. “Saving up to the match is a break-even point. Participants won’t get better returns from saving after that than the tax benefits they get from an HSA,” he contended.

Stout told attendees she had a client whose employees, for years, never knew they had an HSA available, because education was coming from the health plan broker and not the retirement provider. “I think the two should team together to educate participants,” she observed.

Forsythe added that plan sponsors and providers should align HSA savings with retirement savings—that way, participants can go online and see both.

As for investing HSA assets, Stout noted that the HSA industry is behind the DC plan industry as far as investing. She contended this is another argument for why retirement plan providers and advisers should be more involved with educating about the accounts. Some HSAs mirror investments in the plan sponsor’s DC plan. “I’d like to see legislation allowing HSA contributions to be defaulted into a target-date fund [TDF],” she said.

Stout said, if a plan sponsor wants its adviser to also advise on HSA investments, it should put that in his contract. She warned that those services may cost more.

Robertson stressed that HSAs are not plans; they are individually owned accounts. And, because they are not Employee Retirement Income Security Act (ERISA) plans, plan sponsors have to be careful about the investment offerings; there is no safe harbor for mirroring the DC plan investment lineup.

Shaver noted, however, that many plan sponsors are still trying to educate their employees about why high-deductible health plans (HDHPs) and HSAs are important, so adding education about investing HSA dollars has yet to be a high priority.

He also pointed out that maximizing DC plan and HSA contributions is not practical for every employee.