November 20, 2013

Workers Cut 401(k)s as They Fatten HSAs: Mercer

With the Affordable Care Act, health care and its cost are top of mind, to the detriment of retirement savings

In spite of growing concern about health care and how they’ll pay for it in retirement, 401(k) plan participants expect to slow down their contributions, according to a report released Tuesday by Mercer.

These new results follow the firm’s release earlier this month of data that shows workers are under the impression that they’re maxing out their 401(k) contributions for the year when in fact they’re only about halfway there.

According to the Mercer Workplace Survey, participants expect to save slightly less over the next 12 months, despite being relatively optimistic about the economy. Those over 50 expect to cut back on savings by as much as 18%.

The problem may be that plan participants are having trouble sharing their saving between different priorities, Dave Tolve, U.S. leader of Mercer’s defined contribution administration business, told ThinkAdvisor on Wednesday.

“A big driver of employee concern and savings activity has to do with health care concerns,” Tolve said. “Everyone talks about the convergence of health care savings and expenses in retirement, and the survey speaks loud and clear to the fact that people’s savings activities will directly reflect their concerns and attitudes with health care expenses in retirement.”

As evidence, he pointed to the rise in popularity of high-deductible health plans and health savings accounts that are frequently offered with them. Almost two-thirds of respondents said their employer offers a HDHP, and 54% say they are enrolled in it. Of those, 83% also have access to an HSA.

“What I’m starting to see is people viewing health care savings mutually exclusive to retirement saving,” he said. “What we expect is happening is as health care savings account contributions are at an all-time high -- 68% of respondents who have a high-deductible plan are contributing to a health savings account -- our expectation is that there’s a correlation between saving in your HSA and on a corresponding basis, reducing your saving into your 401(k).”

Tolve said he’s seen similar behavior among participants who take a loan from their 401(k). When they begin paying back the loan, they lower their contribution level to the plan in order to reduce the hit on their take-home pay. “If employees are viewing this HSA contribution as a new deduction from their paycheck, in order to keep their take-home pay level, they might be lowering their 401(k) contributions."

The report also noted that respondents who opt for HDHPs tend to be younger, more likely to have children and more educated than the average participant, although their income and account balances are just average.

Mercer noted that it isn’t clear if participants are cutting back on saving overall, or if they just aren’t using their 401(k) to do it. More than 60% of households said they have savings accounts other than their 401(k), but the survey didn’t ask about their contributions to those accounts.

Even as respondents admit they’ll be saving less, they cited paying for health care as a major concern in retirement. While retirement is the main savings objective for more than 70% of respondents, the percent who cited saving for health care expenses in retirement as their top savings priority has doubled since 2007 to 34%. Just 35% said they think they’ll have enough saved to pay for health care after they stop working.

Among the over-50 crowd, paying for health care is the No. 1 retirement concern. Forty-five percent say their savings focus was on future health care costs, and they’re almost twice as likely as all respondents to say it’s their biggest worry.

Respondents were generally optimistic about the economy. Over three-quarters said they expected growth in the next year, and the percentage who expect a recession has been falling since 2011. They’re looking forward to higher home values, company profits and equity values. However, health care reform is something that has many respondents worried.

Support for health care reform is strongest among younger workers, but anyone over 35 is unlikely to be confident in their understanding of the Act. Compared to last year, respondents were more likely to say they would be worse off when it comes to federal taxes, the cost and quality of care, the benefits they receive at work and their situation overall.

With improvements in the markets and less volatility overall, participants started turning away from their advisors, the report found. Just a third of respondents said they work with a professional advisor, down from 36% in 2012.

However, Mercer found that in every way, participants who work with an advisor are better off than those who don’t. Over 80% said they’re confident they’re ready for retirement, compared to just half of those who don’t work with an advisor. Seventy-one percent said they’re confident about paying for health care, compared with just 40% of participants without an advisor. They’re less likely to consider delaying retirement or working part time, and are confident they’ll be able to leave money to their family or charities when they die.

“When they market is performing well and people’s account balances are way up, they potentially don’t see the need for advice and the cost of advice as much as they do when they’re troubled,” Tolve said.

“We, collectively--plan sponsors, service providers, advisors--need to make sure employees continue to save in both areas, and not to just make a choice and pirate their 401(k)s.”

Mercer surveyed more than 1,500 people who were participating in an employer-sponsored retirement plan and were also enrolled in their employer’s health plan. Interviews were conducted online in May and June.

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