CVKQP %CP$GPG V'ORNQ[GTU'ORNQ[GGU · 2018. 3. 15. · accountability for healthcare usage. In short, a migration to HDHPs can be an important step in controlling employer healthcare

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:

mParticipation rates in both 401(k) and health savings accounts (HSAs)

have increased.

mDeferral rates in both 401(k) and HSA accounts have increased.

mGreater HSA participation and savings should facilitate increased high

deductible healthcare plan engagement.

mParticipants 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.

mMore 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:

mEmployers 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.

mEmployees, 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...”


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


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%


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. ..”


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




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




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

Perspective Partners, LLC is a subsidiary of Manning & Napier Group, LLC

CVKQP %CP$GPG V'ORNQ[GTU'ORNQ[GGU · 2018. 3. 15. · accountability for healthcare usage. In short, a migration to HDHPs can be an important step in controlling employer healthcare

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