In a recent WealthManagement.com article, Rick Irace, COO of Retirement, shares his thoughts on potential developments that retirement plan consultants should monitor through 2020. As always, plan consultants should keep up with the latest issuances from the Department of Labor, the SEC, and other government agencies. 2020 is also an election year, which means “it’ll be interesting to see what—if any—changes to the retirement plan landscape are discussed.” Advanced analytics are continuing to gain more and more prominence among plan sponsors and service providers, alike, which should advance the ability to forecast retention, gauge plan effectiveness, expand data points, and improve services.
SVP Barb Van Zomeren recently contributed a byline to Employee Benefit News in which she discusses how advisors can help women overcome retirement savings hurdles. According to EBRI, the average retirement savings shortfall for single women is nearly twice that of single men. The Social Security Administration reported in 2019 that unmarried women rely on Social Security for 45% of their total income, compared to 32% for unmarried men and 27% for couples. Van Zomeren states that the main reasons for these discrepancies are that women earn 18.6% less than men on average, live 2.4 years longer, have more healthcare costs, and are more likely to take career breaks to focus on family care.
Advisors can help their female clients by encouraging them to save in an IRA if eligible, contributing to an HSA for future medical costs, contributing enough to retirement plans to receive a full employer match, and learning more about investing.
In a recent WealthManagement.com article, Rick Irace, along with other industry thought leaders, summarized key trends and developments in the retirement industry this past year. Irace noted that plan sponsors’ main goal has been to drive positive outcomes for employees. Ultimately, employers understand that overall financial wellness is crucial to “ensuring that employees are happy, healthy, and productive.” The biggest topics of conversation have been security, service, data protection, and risk governance, as sponsors want assurance that plan providers can provide the support needed to run their plans while offering high-level service that’s built on trust.
A recent CNBC article addresses how ABLE accounts have changed the lives of many people living with disabilities. Before ABLE, federal assistance programs didn’t allow these individuals to have assets over $2,000 and continue to qualifiy for disability benefits. This cap was put into place in 1964 and was outdated, which was a major contributor to why 31.5% of 21-64 year olds with cognitive disabilities were living below the poverty line in 2017. Today, ABLE plans allow someone to save up to $100,000 in an account and contribute up to $15,000 a year without jeopardizing eligibility for federal assistance.
The article references the scope of the ABLE market, noting that Ascensus currently serves as program administrator for 20 states and Washington, D.C. As of November, ABLE account owners on the Ascensus platform have contributed $51.9 million in savings and have withdrawn $16.7 million to pay for qualified expenses.
Health savings accounts offer a unique triple tax advantage
The health savings account, or HSA, can be a powerful savings tool—if you approach it the right way.
These accounts, which Congress authorized in 2003, are more than just a simple savings tool for medical emergencies. Retirement planners laud the HSA’s triple tax advantage and its use as a complementary savings vehicle to 401(k) plans.
Oftentimes when people first hear of HSAs, it is during this time of year. For companies with policies that start in January, open enrollment typically happens in the fall. During this period, many employees are already stressed about choosing and selecting other benefits.
“I don’t think most people understand HSAs from the get-go,” said Roy Ramthun, a consultant who specializes in HSAs. “From my experience, the HSA gets 30 seconds of the health benefit presentation. It’s all about the insurance, and then ‘Oh, you have this.’”
HSAs are unique in the triple tax advantage they offer: You can contribute to them by setting aside pretax earnings without paying federal or state income tax. From there, that money can be invested and grows tax-free. Additionally, if used for medical expenses, you can withdraw this money tax-free before retirement, which you can’t do with a 401(k) or an individual retirement account.
Eric Remjeske, president of Devenir Group LLC, said since Congress authorized these accounts in 2003, the number of accounts and the average account balance have both grown over time. By 2011, there were 6.2 million HSAs, according to Devenir Research; this past June, that number had grown to 26.3 million.
More money is flowing into HSAs every year. Devenir Research data show that $43.5 billion was deposited in HSAs in 2018, with $10.2 billion invested, a sharp increase from the year before when $31.5 billion was deposited and $5.5 billion invested. By 2021, Devenir estimates that number will rise to $67 billion deposited with $21.2 billion invested.
While the 401(k) remains the predominant retirement savings vehicle, Mr. Ramthun recommends contributing to both a 401(k) and HSA, especially if your employer offers a match for either.
“Advisers are now asking the question: Where do you put the money, 401(k) or HSA?” said Steve Christenson, executive vice president at Ascensus, a retirement and college savings service provider. “They’re seeing more of a balance amongst consumers.”
To make the most of both, research if your employer offers matches. If your employer also offers an HSA match, Mr. Ramthun recommends prioritizing that contribution, as you’ll eventually be able to reap greater benefits from the HSA’s triple tax advantages. From there, contribute to your 401(k), and if your employer also offers a match there and you’re taking advantage of it, you’ll be benefiting from both savings plans.
The HSA contribution limits for 2020 are $3,550 for an individual with a high deductible health plan and $7,100 for an individual with family coverage. The catch-up contribution amount for those 55 years old or above is an additional $1,000. The amount contributed to an HSA doesn’t affect the contribution limits for 401(k) plans or IRAs, which are $19,500 and $6,000 respectively for 2020.
One approach to the HSA is to consider paying for current medical expenses out-of-pocket after establishing the HSA; you can then file for reimbursement in retirement. This way, you can supplement your retirement income—entirely tax-free.
If you’re taking this approach, you should make sure you invest your HSA balance in a diversified portfolio, so you can maximize its potential return. According to 2019 data from Ascensus, less than a third of HSA account holders eligible to invest their funds actually did so.
Meanwhile, keep track of the medical expenses you pay out of pocket. Keeping these receipts on hand means you can then file during retirement to have them reimbursed. But remember: You have to keep the receipts from any medical expenses you paid for out-of-pocket before retirement, just in case the IRS ever comes knocking for an audit.
An HSA can also be considered as a “rainy day” medical fund that works in tandem with your 401(k) to help offset the cost of out-of-network care, over-the-counter medicines or other things your insurance may not cover. Even if you’re healthy now, studies show you could still be spending much more on medical expenses once you enter retirement.
Remember: You can’t keep contributing to your HSA once you’re enrolled in Medicare. So maximizing contributions now will allow the miracle of compounding to work, growing that money in your HSA over time.
“Everything about retirement planning says, ‘Start young, be regular and invest,’” Mr. Ramthun said. “That’s what we want people to hear about HSAs.”
Throughout the ages, women have grown adept at doing more with less. It’s a skill that will stand many of today’s women in good stead when it comes to retirement savings.
Compared with men, women generally earn less, take more career breaks and live longer, so it stands to reason that they need more income — not only for general living expenses, but to pay for additional healthcare associated with aging. Women who reached age 65 in 2016 are expected to live almost three years longer than men, according to the Social Security Administration. What’s more, a recent study claims that by age 65, a woman will need to have saved $161,000 — compared to a man’s $148,000 — to cover healthcare costs in retirement.
It all adds up to an inescapable, if frustrating, conclusion: If women want to sustain a secure lifestyle during their retirement years, they’ve got to save more.
Bridging the 18% gap
Women’s salaries, on average, are 82% of men’s, according to a recent Bureau of Labor Statistics report, and this 18% gap may mean less money available to put toward retirement each year. While an HSA might not close the pay gap, it can help a woman’s money go further. HSAs offer unparalleled tax benefits. The “triple tax advantage,” as it is known, allows tax-deductible contributions, tax-deferred earnings and tax-free distributions for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses, for a partial list of qualified medical expenses.) These tax savings can free up money to save or spend elsewhere, while the unused contributions can be saved for retirement. HSA assets can pay for qualified medical expenses, but they don’t have to be used at all. Unlike a health flexible spending arrangement (FSA), an HSA is not subject to a “use-it-or-lose-it” rule; balances are carried forward from year to year — even into retirement.
Turning career breaks into savings breaks
Most workplace retirement plans require ongoing employment in order to save, which can mean fewer opportunities for women, who tend to take career breaks more often than men. But with an HSA, women can remain eligible to contribute to an HSA even while they are not working. For example, if a woman is covered by her spouse’s HSA-eligible, high-deductible health plan, she may continue to put money into her HSA, up to the annual limit. This means her HSA can keep growing even during a career break.
HSAs in retirement
An HSA can lessen the burden of higher healthcare costs and can be used as supplemental income. While women cannot contribute to an HSA once they are enrolled in Medicare, they can still keep using HSA assets during retirement.
Sure, HSA assets can be used to pay for qualified medical expenses — including Medicare premiums and certain qualified long-term care expenses — instead of dipping into retirement plans or IRAs. But once a woman reaches age 65, she can take HSA distributions for any reason without penalty (although she will pay taxes on those distributions that are not qualified medical expenses).
With so many savings obstacles lined up against them, women in the workforce need to have a plan to meet their retirement savings goals. While every individual’s strategy will be different, one thing is certain: for women, making HSA savings a priority now could pay off in the future.
I’ll never forget the first cold dash of reality around the challenges of saving for college. Newly returned to work from my maternity leave after the birth of my first son, I was welcomed back by a senior executive who said to me, “You know you’ll have to start saving $800 a month right now if you want to send him to a private college, right?” If I wasn’t feeling worried enough about the challenges of parenting, well, that did it.
Needless to say, we didn’t start saving $800 a month…but we did start saving. A little at a time as we adjusted to the expenses of childrearing, and more as he and his brother and sister grew and the day care bills disappeared.
And as it turns out, that’s how most people save.
At Ascensus, we administer over 4 million 529 accounts, providing us with a very good view on how families use 529s to save for college. Unsurprisingly, the vast majority are NOT starting an $800 automatic monthly contribution upon the birth of a child! Here’s what they are doing:
On average, 529 savers are:
- Opening an account with a lump sum of about $3,800. Most 529 plans allow accounts to be opened with small contributions of $25 or even less, but in general it looks like account owners are saving up in another vehicle or receiving a large gift and then investing in a 529.
- Contributing a little at a time, over a long period of time. Ascensus processes millions of 529 contributions each year; about 60% of those contributions are $100 or less. Only a small percentage are greater than $500.
- Saving enough to fund about 43% of an in-state, public university. Accounts that grow to cover the cost of an average private university are few and far between.
- Increasingly using gifting tools to help them save. Across our 529 plans – Ascensus expects to process over $250 million in 529 gifts in 2019 through our Ugift platform.
The benefits of starting early
Nearly half of Ascensus-administered accounts were opened when the beneficiary was 5 or younger. The good news for those account owners is that this advanced planning can potentially get them much closer to their savings goals. When we look at accounts with beneficiaries age 16-17, those accounts that have been open at least 11 years have an average balance of over $44,000. Accounts opened 5 years or less for this same age group have accumulated significantly less, on average, about $26,000.
That first son just graduated from college – on the same day that his brother graduated from college 500 miles away! Thanks to their 529s, we were able to help them meet their education goals. It certainly wasn’t the straight-line formula that was laid out to me 22 years ago, but then what aspect of parenting conforms to a straight-line formula?
As credit unions continue to seek ways to increase their member count and make capital available to those members, they often overlook a key source of longer-term deposits: IRAs. By taking a generational approach to the opportunities that IRAs provide, credit unions can expand their deposit base.
Millennials are good savers and are looking for financial services that they trust and that serve a worthwhile purpose. Credit unions can attract these younger savers by making educational modules about saving with an IRA available on their websites, as well as other outlets, like YouTube. And while millennials are likely to establish an account online, they are just as likely to visit a credit union branch directly, if inclined to do so. Credit unions should have a strong online new account set-up process, but also be prepared for in-person visits.
Generation X Approach
Generation Xers, who have now entered their 50s, are facing new life changes. Their children are close to, or have already, headed off to college, so gen Xers are beginning to refocus on retirement. And they are finding out that their retirement savings is behind plan. This group may benefit from consolidating their retirement plan assets and developing a revised retirement strategy.
Gen Xers are also starting to face the loss of their parents. They may be inheriting their parents’ savings, including IRAs. Under current regulations, IRA beneficiary options can be confusing and gen Xers may not realize the potential value of keeping those assets in an inherited IRA. This type of information or guidance may not be readily available to gen Xers. They likely will have questions, prompting them to call or visit the credit union. Credit unions should be ready to answer their questions and walk generation X members through all of their options as IRA beneficiaries
Baby Boomer Approach
Baby boomers are now reaching traditional retirement age (age 65) at a rate of 10,000 per day. This generation is either in retirement, partial retirement, or still fully employed. They are clearly focused on their specific retirement needs, both in terms of income and healthcare coverage. They are looking for advice on rollovers from employer plans, ways to receive a stable monthly income, and someone to assist them with how to leave behind whatever remains to future generations. Credit union staff that recognize the baby boomer’s areas of focus and how an IRA can help them will be able to better address their concerns.
Become a Trusted Source
Regardless of which generation they fall into, people will remain loyal to the financial organization that helped them create a successful outcome. The key is to become their trusted source for savings education and problem solving. By effectively assisting members with their IRA questions and offering savings solutions, a credit union can become an integral part of that successful outcome. This may lead to more deposits for a longer period of time, and, in turn, enable a credit union to assist an even larger circle of potential members on their road to success.
A recent SavingForCollege.com article features data from the Ascensus 529 platform and highlights the importance of starting to invest early for beneficiaries’ future education. It notes that as of year-end 2018, over half of all Ascensus 529 accounts were opened when the beneficiary was five years old or younger and 38% were opened when the beneficiary was two years old or younger. With increasingly high costs for college and private school, families that make a savings plan while their children are still very young can prevent financial panic down the road.
A recent feature published by the National Association of Plan Advisors (NAPA) spotlights retirement plan design trends and data on employees’ savings progress released by Ascensus earlier this year. The article highlights the impact that auto features can have on plan participation and underlines the fact that 401(k) plans on our platform that couple auto features with a match have the highest overall average participation rate at 84%. It also covers results from our Retirement Outlook Tool which allows employees to track their progress to retirement savings goals based on personal variables and their current savings rates. Younger generations of employees tend to make up the smallest portion of the segment of savers who are “on track” to goals, but they also have a longer time horizon to retirement and have plenty of opportunities to ramp up their current efforts.