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Integrated Benefits Optimization A Perspective Partners White Paper
How Integrated Benefits Optimization
Can Benefit Employers & Employees
1
Executive SummaryEmployers and employees sometimes seem to be on opposite sides of a battle
over benefits: employers are fighting rising health costs, while employees
are facing benefits that are inadequate for their long-term retirement and
healthcare needs. However, to the extent that some of these problems are
due to inefficiencies and lack of coordination in how health and retirement
benefits are delivered, a win-win solution for employers and employees is
possible by improving the coordination of benefits delivery.
An example can be seen in the experience of XYZ Corp.* (a pseudonym for
the actual company), which implemented NestUp Managed Deferrals, a
coordinated and automated approach to health and retirement benefits
delivery. After just one enrollment cycle, examples of the win-win for
employer and employees can already be seen:
m Participation rates in both 401(k) and health savings accounts (HSAs)
have increased.
m Deferral rates in both 401(k) and HSA accounts have increased.
m Greater HSA participation and savings should facilitate increased high
deductible healthcare plan engagement.
m Participants are beginning to allocate HSA dollars to long-term
investments, in recognition of long-term health needs and the potential
for greater tax benefits. This, along with greater deferral and participation
rates for both plans, should enhance the retirement readiness of the
employee base.
m More payroll dollars are being shielded from FICA tax due to increased
HSA participation.
Notably, the implemented approach is user-friendly and highly-automated,
and can be implemented using existing 401(k) investment and healthcare plan
options. Therefore, the results of better health and retirement benefits
coordination can be achieved with minimal disruption or administrative
burden.
* XYZ Corp. is a pseudonym for a company based in Fairport, New York. XYZ Corp. and
Perspective Partners operate independently of each other but do have an affiliation due to
common ownership.
2
Table of ContentsExecutive Summary Page 1
Introduction Page 3
Current State of Health and Retirement Benefits Delivery Page 4
Analysis of Inefficiencies and Their Impact Page 5
Components of a Solution Page 7
Case Study: Debut of NestUp Managed Deferrals Page 9
Conclusion Page 11
Sources Page 12
3
“Coordination between health and retirement benefits delivery can squeeze out some of the inefficiencies of this system, making possible more of a win-win for employers and employees,...”
IntroductionEmployee benefits delivery in the United States
is not working to the satisfaction of employers
or their employees. For years, employers have
grappled with rising costs, while their employees
have received increasingly inadequate benefits.
A notable aspect of the problem is that healthcare
and retirement benefits have traditionally been
delivered through separate systems, positioned as
having completely unrelated objectives. In reality,
health and retirement benefits are inextricably
linked, both because they represent hard choices
made by plan participants about how to allocate
their benefit dollars, and because healthcare
expenses are likely to represent a significant
portion of retirement spending1.
Coordination between health and retirement
benefits delivery can squeeze out some of the
inefficiencies of this system, making possible more
of a win-win for employers and employees. For
example, right-sizing benefits such as healthcare
for employees’ personal situations can result in
better cost management, and optimized savings
strategies can improve retirement outcomes. This
paper will describe the potential for improvement
that such coordination represents and how it
might be achieved.
CONTACT US
Perspective Partners
290 Woodcliff Drive
Fairport, NY 14450
585-325-3925
800-408-5375 x428 TOLL FREE
585-385-0742 FAX
www.perspectivepartners.com
4
Current State of Health and Retirement Benefits DeliveryWhile it is deeply ingrained in the
American private-sector job market,
the system of employer-provided
health and retirement benefits sets
up an inherent conflict from which
both sides suffer:
m Employers face rapidly-rising
benefits costs, especially in
healthcare. According to figures
from the Bureau of Labor
Statistics (BLS), from the beginning
of the year 2000 through the end
of 2014, medical care inflation
grew at a 65 percent faster rate
than consumer prices in general2.
m Employees, meanwhile, receive
benefits packages that seem
unlikely to meet their healthcare
or income needs in retirement.
Employees are painfully aware of
this inadequacy: the Employee
Benefit Research Institute (EBRI)
found that even among American
employees actively participating in
a retirement plan, only 24 percent
described themselves as “very
confident” they would have
enough money to live comfortably
throughout their retirement years3.
Conflict may seem inevitable given that
employers and employees are generally
on opposite sides of this cost/benefit
equation, but inefficiencies in how the
benefits industry is structured have
contributed to the adverse results of
that conflict. For one thing, health and
retirement benefits are generally
confined to separate silos rather than
coordinated. This fails to recognize
that there is an inextricable
relationship between health and
retirement benefits: not only are
employees typically trying to fund both
with limited financial means which
demand trade-offs between the two,
but also healthcare costs are likely to
eat up a significant portion of income
in retirement4.
Another inefficiency in benefits
delivery is in the methods used to
educate employees about their
options. Too often this involves
classroom-type sessions that are time
consuming for both those delivering
and those receiving the message. Also,
this classroom approach often leaves
too wide a gap between education and
the means of taking action. The result is
that education efforts add to the
employer cost of benefits while often
not sufficiently improving employee
utilization of benefits. The result, as
described by U.S. Treasury official
J. Mark Iwry, is that Defined
Contribution Plans are really
“undefined contribution” plans, with
savings levels having little relation to
probable needs5.
Ironically – and fortunately – these
structural inefficiencies are the reason
a win-win solution for employers and
employees is possible. Rather than
either side benefitting at the expense
of the other, both can benefit by
addressing those inefficiencies and
the problems created by them.
Addressing inefficiencies can create
more cost control for employers while
delivering more effective benefits
for both highly-compensated and
rank-and-file employees. Meanwhile,
introducing more of a seamless
approach to benefits delivery can
also ease the administrative burden
on overtaxed Human Resources
departments.
A closer analysis of how these
inefficiencies are costing employers
and employees will yield insights
into where the opportunities for
improvement can be found.
5
Analysis of Inefficiencies and Their ImpactIf health and retirement benefits were truly unrelated,
there might be no detriment to having them delivered to
employees as two separate and unrelated plans. As it is,
though, this lack of coordination contributes heavily to the
inefficiency of benefits delivery.
Significantly, health and retirement benefits are usually
delivered not only by different providers, but they are
thought of as having unrelated missions. Retirement plans
are seen as providing long-term income, while healthcare
plans have historically been put in place to insure against
immediate medical needs.
Why is this a problem?
For one thing, viewing healthcare savings solely in terms
of meeting near-term needs fails to acknowledge the fact
that healthcare will likely represent a substantial portion
of a person’s expenses in retirement. An analysis of the
2013 Consumer Expenditures Survey by the BLS shows
that while healthcare expenditures represent 5.69 percent
of pre-tax income for consumers in general, this number
roughly doubles to 11.23 percent for people 65 and older6.
In short, in retirement healthcare expenses are not
something that can be taken in stride; they are a
significant portion of the household budget.
While there is the potential to use HSAs to prepare for
long-term healthcare needs, the evidence is that employees
typically use them simply to provide for near-term
expenses. The EBRI reports that the average HSA balance
as of the end of 2013 was $1,766. Significantly, the average
distribution from HSAs in that same year was $1,9537. In
other words, HSA participants seem to be simply topping
up their balances as needed to prepare for the year ahead,
as opposed to building balances to prepare for long-term
healthcare needs.
This is a missed opportunity, because not only could
HSAs be used to supplement 401(k) retirement savings,
but under certain circumstances they may be a more
cost-effective use of employee benefit dollars.
Figuring out just what those circumstances are –
i.e., when putting money into an HSA is more cost-effective
than putting it into a 401(k) and vice versa – is a somewhat
involved decision. For example, in 401(k) plans with an
employer match, an employee’s first deferral dollars are
best used to maximize that match. However, once the
match is maximized, it may make more sense for deferral
dollars to be directed toward the HSA rather than the
401(k). This is because in the long run, the tax
characteristics of HSAs could mean more spending power
vs. the 401(k) for virtually all employees. HSAs do not
require minimum distributions to be made when the
participant reaches age 70 ½, and when distributions are
made they are not subject to income tax as long as they are
used for qualified medical expenses. In general, only when
HSA deferral limits are reached should the employee’s
deferrals be directed back towards the 401(k) plan.
“...This is a missed opportunity, because not only could HSAs be used to supplement 401(k) retirement savings, but under certain circumstances they may be a more cost-effective use of employee benefit dollars...”
Integrated Benefits Optimization A Perspective Partners White Paper
6
vehicle is the only option provided for these accounts.
Along with their employees, employers also suffer from
the lack of coordination between retirement and
healthcare plans. Fear of the deductible can cause
employees to shy away from choosing high deductible
health plans (HDHPs) if they are not confident in their HSA
balances. Lower-deductible plans are likely to be more
expensive for employer and employee alike and may well
be subject to faster-rising costs over time because the
lower deductible effectively absolves employees from
accountability for healthcare usage. In short, a migration to
HDHPs can be an important step in controlling employer
healthcare costs, but inadequate participation in HSAs is a
barrier to that step.
Under some circumstances, it might also cost employers to
have employees allocate dollars to 401(k) plans rather than
HSAs, since 401(k) deferrals are subject to FICA payroll
taxes, while HSA deferrals are not.
Lastly, an additional downside to the current benefits
model is that to the extent that employees perceive their
benefits as inadequate, the employer suffers the recruiting,
retention, and morale consequences.
HSAs may also offer superior value to participants in
retirement because funds used for qualified medical
expenses are not included in the means testing for
Medicare, while 401(k) funds are. The advantages of HSAs
may even extend beyond retirement. Inherited 401(k)
balances are subject to income tax when withdrawn, while
inherited HSA balances can remain in an HSA where they
can be used tax-free by a spouse to pay medical expenses
– including expenses that may have been left by the
deceased account holder.
Because of the complexity of the trade-off between 401(k)
and HSA deferrals, this is another area in which the lack of
coordination between health and retirement benefits is
damaging, because it leaves employees with little guidance
as to how to allocate their precious benefit deferrals, let
alone a means of expediting that decision.
An additional problem for employees is that because HSAs
are presented as a means of funding short-term expenses
rather than as part of a long-term savings program, they are
typically invested exclusively in low-yielding, short-term
liquid vehicles rather than in long-term assets appropriate
for a retirement time horizon. Often, a short-term deposit
7
The Components of a SolutionHow could the problems described above be rectified?
One approach would be to address
the fundamental inefficiencies and
their consequences with a system that
seamlessly ties together retirement
and healthcare benefits delivery.
This would present retirement and
healthcare choices to participants as
a coordinated program to meet
long-term needs, rather than as
separate and unrelated savings
approaches. Another element of a
more coordinated approach would
be to more closely link employee
education with the opportunity to
take action. This type of solution
would have several advantages:
1. It would allow employees to get
more for their benefit dollars by
guiding their deferrals to optimize
employer matching, while also
recognizing the potential tax and
other benefits of HSA plans cited
in the previous section.
mFor rank-and-file employees,
this means allocating their
benefit dollars between health
and retirement plans in the most
efficient manner.
mFor highly-compensated
employees, this means not
just recognizing the potential
advantages of HSA plans, but
also making greater use of them
as a long-term supplement to
their 401(k) plans, since these
employees might have their
401(k) deferrals limited by
annual contribution limits or
discrimination testing.
2. Along with showing employees
how to optimize their deferrals,
a coordinated education and
implementation approach would
increase overall deferrals by
Integrated Benefits Optimization A Perspective Partners White Paper
8
presenting a clear demonstration
of the cost/benefit of the
alternatives available, and by
making choices more immediately
actionable.
3. A more coordinated message
would raise awareness of the need
to build long-term health savings.
The EBRI found that employees do
warm up to HSAs once they have
had them available for a while, but
there is a lengthy learning curve
involved. Only 12 percent of HSA
accounts receive the maximum
employee contribution in the first
year the plan is established, but
this percentage builds gradually as
the plan ages. For HSA accounts in
existence for ten years or more, 44
percent of accounts maximize their
contributions8. If this learning
curve could be accelerated, fewer
participants would miss out on
several years of potential deferrals.
4. A properly coordinated health and
retirement approach would
include the option of investing HSA
balances in long-term investments,
as a complement to traditional
short-term liquidity vehicles. This
could be facilitated by coordinating
some portion of HSA investments
with 401(k) investments, including
making HSA investment options
available which correspond with
Qualified Default Investment
Alternatives (QDIAs) on the 401(k)
menu. This would accommodate
the long-term growth of balances
beyond a year’s deductible or
expected out-of-pocket expenses.
5. More closely linking deferral
choices and education with
available investment options
would improve employee
follow-through.
6. Integrating health and retirement
benefits delivery could help
employers control benefit
costs. Primarily, this would be
accomplished by enabling broader
participation in HDHPs, which are
more cost-effective for both
employer and employee. As a side
benefit, in some cases the portion
of payroll exposed to employer
FICA taxes might be reduced as a
result of greater allocations to
HSAs rather than 401(k) plans.
7. Properly executed, addressing
inefficiencies through coordination
between health and retirement
benefits and between
communication and action would
ease the growing burden that ever-
increasing benefits complexity
has placed on human resource
departments, while helping those
departments show measurable
results from their efforts.
Ideally, the coordination of healthcare
and retirement benefits would be
achieved with the continued inclusion
of existing investment and insurance
options, to minimize disruption to
participants and the communication
burden on internal staff.
9
Case Study: Debut of NestUp Managed DeferralsDuring open enrollment in 2014 for the 2015 plan year,
XYZ Corp., a technology company with employees
working out of multiple locations, implemented a
benefits coordination and education solution provided
by Perspective Partners, LLC. The solution, called the
NestUp Managed Deferrals program, gave employees an
intuitive web-based interface from which they could
readily analyze and implement decisions concerning
both their 401(k) and HSA deferrals.
The NestUp Managed Deferral program incorporates elements which directly address the problems described in this paper.
It provides a single portal through which employees can
research and manage their health and retirement benefit
options. It shows participants how to allocate their
available dollars between the two plans, to get the most
after-tax benefit for those dollars. Finally, it provides
direct implementation tools for both the 401(k) and the
HSA, so that participants can put their decisions into
action without delay.
Percent of employees increased their overall benefits deferrals
43%
Percent of employees decreased their overall benefits deferrals
8%
Integrated Benefits Optimization A Perspective Partners White Paper
10
After a single enrollment period, the NestUp Managed
Deferrals program has helped XYZ Corp. achieve
measureable results in several of the areas described in
the previous section of this paper as being components of
improved benefits coordination.
Here are areas in which this program has already shown results:
mOptimizing the allocation of deferrals.
• A managed deferrals engine now shows employees
how to get the most value for their benefit dollars
by optimizing employer matching and tax benefits.
• Notably, the case for optimizing deferrals was
compelling enough that 401(k) and HSA options
were presented side-by-side with neither
cannibalizing participation or deferral rates
from the other plan.
mIncreasing overall deferrals.
• Participation rates in both the HSA and
401(k) increased.
• 35 percent of 401(k) participants increased
their deferrals.
• 29 percent of HSA participants increased
their deferrals.
• Plan wide, the average deferral to both the 401(k)
plan and the HSA increased.
• Overall, 43 percent of employees increased their
overall benefits deferrals, vs. 8 percent who
decreased them.
mIncreasing utilization of the HSA.
• Total HSA dollars deferred increased by 14 percent.
• The percentage of employees making the maximum
allowable HSA deferral increased from 16 percent
to 22 percent.
mInvesting HSA assets in long-term investments.
• The program introduced a menu of long-term
investment options to the HSA, coordinated with
options on the 401(k) menu. This includes options
corresponding with the QDIA options on the
401(k) menu. This can help employees invest for
future healthcare needs in addition to keeping
money for immediate needs liquid.
• The percentage of employees allocating HSA
money to long-term investments jumped from
0 percent to 21 percent.
mImproving employee follow-through on decisions.
• Increased 401(k) deferrals were especially
prevalent when the program indicated to
participants that this was advisable. 60 percent of
participants who received a message suggesting
this course of action followed through by increasing
their deferrals, compared to just 17 percent of
participants who did not receive such a suggestion.
• Similarly, 47 percent of those receiving a suggestion
to increase HSA deferrals followed through,
compared with 14 percent of those who did not
receive such a suggestion.
mHelping employer manage benefits costs.
• Employer payroll dollars exempt from FICA tax
increased after the first enrollment cycle of the
NestUp Managed Deferrals program.
mEasing the administration burden through automation.
• The online-based approach succeeded in raising
plan-wide participation while allowing employees
to learn about their benefits options at their own
pace, at their own convenience, and in different
locations.
• The online program includes answers to many
frequently-asked questions, relieving the
administrative burden of having to repeat answers
to employees who ask similar questions.
11
ConclusionThus far, the NestUp Managed Deferrals program has been
rolled out in a single pilot program, through just one enrollment
cycle. Already though, the program has shown encouraging
progress in addressing the fundamental problems described
by this paper. Coordination of health and retirement savings
allows benefits to be deployed more efficiently, while the
communication, planning, and implementation approaches of
the program have helped employees take a step away from the
“undefined contribution” nature of most retirement plans.
The user-friendly automation of the approach suggests it could
readily be implemented on a wider basis.
XYZ Corp. has had high deductible plans in place and has
used one of the nation’s leading health account administrators
for about four years. Yet despite a wealth of awareness and
education, not one employee had allocated HSA funds to
long-term investments. Now that employees have NestUp
Managed Deferrals to provide a strategy that can be
implemented with just a few clicks, 1 in 5 employees are
accumulating HSA funds in long-term investments.
Given all that is at stake in terms of benefits costs to
employers and the long-term well-being of employees, better
coordination of health and retirement benefits is a goal U.S.
companies should be actively pursuing. The experience of XYZ
Corp. with the NestUp Managed Deferrals program is evidence
that this pursuit can be worthwhile for employers and
employees alike.
“...Better coordination of health and retirement benefits is a worthwhile pursuit for both employers and employees. ..”
Integrated Benefits Optimization A Perspective Partners White Paper
12
ENDNOTES
1. Bureau of Labor Statistics, Consumer
Expenditures in 2013, February, 2015
http://www.bls.gov/opub/reports/cex/
consumer-expenditures-in-2013.pdf
2. Bureau of Labor Statistics, Consumer Price
Index: All Items, Medical Care, Retrieved
March 11, 2015
http://data.bls.gov/cgi-bin/surveymost?cu
3. Employee Benefit Research Institute, 2014
Retirement Confidence Survey Fact Sheet
#1: Retirement Confidence, March 18, 2015
http://www.ebri.org/pdf/surveys/rcs/2014/
RCS14.FS-1.Conf.Final.pdf
4. Bureau of Labor Statistics, Consumer
Expenditures in 2013, February, 2015
http://www.bls.gov/opub/reports/cex/
consumer-expenditures-in-2013.pdf
5. Steyer, Robert “Treasury’s Iwry urges more
use of behavioral research in DC plans,” Pen-
sions & Investments, September 16, 2014
http://www.pionline.com/article/20140916/
ONLINE/140919881/treasury8217s-iwry-
urges-more-use-of-behavioral-research-
in-dc-plans?newsletter=daily&
issue=20140916
6. Bureau of Labor Statistics, Consumer
Expenditures in 2013, February, 2015
http://www.bls.gov/opub/reports/cex/
consumer-expenditures-in-2013.pdf
7 Employee Benefit Research Institute, HSA
Balances, Contributions, Distributions, and
Other Vital Statistics—A First Look at Data
from the EBRI HSA Database on the 10th
Anniversary of the HSA, June 2014
http://www.ebri.org/publications/ib/
index.cfm?fa=ibDisp&content_id=5410
8. Employee Benefit Research Institute
Notes, Maximizing Contributions to an
HSA: Findings from the EBRI HSA Database,
January, 2015
http://www.ebri.org/pdf/notespdf/
EBRI_Notes_01_Jan-15_HSAs-Debt.pdf
© 2015 Perspective Partners
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