Want to Become Financially Resilient? Hit the Financial Resources Gym

If Time Magazine had a word of the year, a good candidate in 2020 might be “resilience.”

This year has called upon many Americans to find the strength to bounce back from the health care effects of COVID-19 and the economic impact of job loss and financial duress, not to mention the emotional and mental toll of social distancing, isolation, and civil unrest. Many have. But among those that struggle to adapt, the toll can be high. According to Morneau Shepell’s Mental Health Index Report, people who report that they are undecided or feel that they are adapting poorly to changes in their personal, work, or financial lives have significantly lower mental health scores than those reporting adapting well.

What is the difference between those who adjust to adverse circumstances poorly vs. well? Psychology literature suggests that resilience is an intentional behavior that can be adopted and developed. In other words, rather than simply being a certain trait or characteristic that some people have and other don’t, resilience can be embraced — much like a healthy lifestyle of eating well and exercising.  

The healthy lifestyle analogy resonates with me. I started weightlifting more than two decades ago, and it was transformative. Not only does weightlifting make you stronger, but going to the gym several times a week creates discipline; watching the results and progress you make in lifting weights is emotionally rewarding and satisfying; and, perhaps most important of all, weightlifting is a commitment to health that permeates the rest of one’s lifestyle. Since I started weightlifting, I am inclined to spend more time on other physical activities such as kayaking, hiking, skiing, yoga, etc.

So what equipment do people need in order to adopt a lifestyle of financial resilience? This is the question EBRI explored as we redesigned the American Savings Education Council’s (ASEC’s) re-envisioned web site.

For those who are unfamiliar with ASEC, it is a program of EBRI that is dedicated to educating the public about all aspects of financial security. ASEC does so through a coalition of public- and private-sector partners that share ASEC’s mission of making saving and retirement planning a priority for all Americans. As we redesigned ASEC’s website, we realized that our partners are key; many of them have vast troves of financial wellness resources. By assembling them in one place — on ASEC’s website — we could create a financial resilience hub where people could find tools, information, education, and other resources that would help them achieve their goals, meet the financial needs of various life stages, and face the challenges of circumstances such as caregiving, disability, loss of partner/spouse, and supporting adult children or elders.

Given today’s environment, the website has an entire section devoted to COVID-19 resources such as coronavirus advice for consumers, information on why some communities of color have been hit so much harder by COVID-19, and how the Coronavirus Aid, Relief, and Economic Security (CARES) Act works. Meanwhile, our “Traps & Pitfalls” section covers a broad range of threats to overall financial wellness beyond the pandemic, including coronavirus scams, phishing ploys, predatory lending, and telemarketing fraud.

ASEC‘s website is not the only way EBRI is seeking to address financial resilience. In its upcoming virtual meeting on October 14, ASEC is featuring a session called “Views from the Front: Insights on Guiding Employees Through the Turbulence of the Current Environment.” We’ll hear from those in the trenches — from workers who are struggling with emotional and financial challenges to the employers and financial advisers who are helping them navigate both the financial and the emotional toll the pandemic has taken.

I’m excited about the contribution that ASEC — through such initiatives as its redesigned website and October meeting — can make to the topic of resiliency. Another thing I’ve learned from working out with weights is that muscles have memory. In other words, even those of us who feel that COVID-19 has challenged our resiliency can gain that resiliency back by taking advantage of the proliferation of resiliency resources that are available on ASEC’s website and elsewhere.

Getting to the Whys of Spending in Retirement

whyIt is one thing to understand how people spend their money in retirement; it is another thing to know why they do so.  For example, through its Retirement Security Research Center (RSRC), the Employee Benefit Research Institute found that retirees:

  • Are more often interested in preserving or even growing their retirement savings than spending them down.[1]
  • Often resort to required minimum distributions as their spending plan.[2]
  • Have widely varying spending patterns.[3]
  • Change their spending patterns over time.[4]

Regarding the last two observations, new work within the RSRC based on the Health and Retirement Study Consumption and Activities Mail Survey (HRS/CAMS) data shows that spending declines as people enter retirement and progress through it.  The data show that the average individual aged 55–64 spent $54,500 in 2017. By ages 65–74, spending had decreased on average to $50,300 however, and by ages 75–85 it came in at around $38,500.

But not only does the amount of money being spent decreases, the propensity for people to spend heavily in certain areas also changes. According to HRS/CAMS, the proportion of people who heavily spend on housing in retirement tends to decline over time: from 21 percent for those ages 55–64 to 17 percent for those 65 and older. In contrast, the proportion of those spending heavily on health care increases: from 10 percent at ages 55–64 to 20 percent for those ages 75–85. Interestingly, the proportion of people who do a lot of “discretionary spending” such as spending on entertainment and contributions increases with age: 13 percent of spenders fall into the category at ages 55–64 while 18 percent do for ages 65 and above. However, discretionary spending becomes proportionally more focused on gifts and contributions for the oldest age cohorts: Gifts and contributions make up about half of discretionary spending for people 55–64 but exceed 60 percent for those ages 75–85.

What we cannot understand from the data, however, is why people are changing their spending as they do. This is critically important in designing retirement spending strategies. For example, before my dad retired, he was a foodie. He always wanted to go to the fanciest restaurants and enjoyed dining lavishly. When he retired, his behavior began to change. The local diner ultimately because his favorite restaurant and fried calamari his favorite meal choice — not exactly upscale. I worried that dad wasn’t enjoying his retirement because, even though he had the money, he didn’t spend it on treats for himself. Was he worried about running out of money? Was he trying to leave a big nest egg to his children? Or was something else at work here? I asked Anna Rappaport of the Society of Actuaries’ Post-Retirement Needs and Risks Committee about it, and she had the following opinion: It was probably indeed something else. Some older people have a hard time hearing and/or lower stamina; they don’t like sitting in noisy restaurants for long periods of time.  Others find that what was exciting and fun a few years ago is no longer engaging. Some find that with changes in health and digestion, the foods that were exciting no longer work for them.  In other words, it may not have been about money at all.  Very possibly, my dad’s priorities and preferences had just changed.

But think about the implications when it comes to spending tools. Consider the possible differences in spending scenarios my dad faced at retirement:

A) He wanted to continue his current foodie lifestyle at first but then later realized he no longer enjoyed it or that his foodie group of friends had disappeared from his life.

B) He continued being a foodie at first, but ultimately other priorities emerged.

C) He wanted to continue to be a foodie but was fearful of spending too much and not having enough for high health care bills.

D) He wanted to continue to be a foodie but also wanted to leave an inheritance.

These are four dramatically different scenarios for my dad as he planned his spending approach in retirement. The first might require education. My dad might have thought at age 65 he would want to be a foodie throughout retirement, but the reality was different: His interest (and spending) waned. This could have been anticipated and planned for accordingly. The second scenario might necessitate a better understanding of what would replace being a foodie.  Perhaps it would be something equally or more costly such as travel.  Or perhaps my dad just wanted to stay at home with his book club (again, with lower spending).  Scenario C might raise the specter of solutions addressing my dad’s concerns about health care bills. Certainly, the least optimal approach would be to try and self-insure out of fear of high out-of-pocket costs. The last scenario might beg the question — if giving is so important, why not do it now as opposed to waiting until the end of retirement?

Clearly the “whys” of spending in retirement can make a large difference in the spending advice given.

With the generous support of the RRF Foundation for Aging and EBRI’s Retirement Security Research Center, we are embarking on a project to understand what drives retirees to spend the way they do.  Our research will include surveys and interviews to gain a better understanding of what drives retirement spending decisions and how to optimize them. Combined with data from our IRA database and HRS/CAMS, this research is intended to provide a holistic view of the whys of retirement spending. If you are interested in joining the RSRC, please reach out to Betsy Jaffe at jaffe@ebri.org to participate in this important initiative.

 


[1] Sudipto Banerjee, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).

[2] Craig Copeland, “Withdrawal Activity of Individuals Owning Both Traditional and Roth Individual Retirement Accounts,” EBRI Issue Brief, no. 503 (Employee Benefit Research Institute, March 26, 2020).

[3] Forthcoming EBRI Issue Brief.

[4] Zahra Ebrahimi, “How Do Retirees’ Spending Patterns Change Over Time?,” EBRI Issue Brief, no. 492 (Employee Benefit Research Institute, October 3, 2019).

The Future of Employment-Based Benefits — Hard Facts, and Some Bright Spots

The year 2020 will likely go down as one of the most challenging in recent American history: a pandemic, quarantines, rampant unemployment, civil unrest — it may be difficult for many people to find a silver lining right now.

But there are bright spots. On May 30th, the first American astronauts were launched into space from American soil on an American space shuttle since 2011. Even more amazing, it was the first time any private-sector company in the world had done so. The fact that companies like SpaceX can do great things even in the face of such turmoil reminds me of why I joined the Employee Benefit Research Institute (EBRI) more than two years ago. For American companies to succeed at such momentous endeavors, it takes motivated workers who are healthy and financially stable. Employee benefits can be a crucial part of that equation.

Yet, the availability of health, retirement, and financial wellness benefits may be at a crossroads. As a result of COVID-19’s impact, the American Retirement Association estimates that 42 percent of small businesses may be candidates for 401(k) plan terminations. Using the Retirement Security Projection Model,® Jack VanDerhei, EBRI’s Director of Research, found that if this were true, $31.24 billion would be added to the existing $3.68 trillion U.S. retirement deficit. [1] Further, according to the 2020 Retirement Confidence Survey, more than 6 in 10 workers without a retirement plan have less than $1,000 in savings (vs. just 8 percent of those with a plan).[2]

In that same survey, nearly half of workers reported that their level of debt is a problem, and 77 percent believe it would be helpful to have access to emergency savings accounts or programs. The “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges” Issue Brief found that — at least in 2019 — employers were stepping up. According to the research, more than 4 in 10 employers expressing at least some interest in offering financial wellness programs said they offer or plan to offer an emergency fund/employee hardship assistance as a financial wellness initiative.[3] Yet, this may be changing. Anecdotally, we are beginning to hear that such programs are being delayed in light of the current crisis. Indeed, we are even re-tooling our third annual Employer Financial Wellbeing Survey — to be fielded in late June and early July — to determine whether employers are actually moving away from programs that are already in place.

Similar concerns exist around health benefits. At a minimum, recent developments like the increased use of telemedicine could change the health benefits landscape, a topic which will be explored in EBRI’s upcoming Consumer Engagement in Health Care Survey. However, EBRI’s Director of the Health Research and Education Program Paul Fronstin—with support from Blue Cross Blue Shield—is also interviewing employers to understand if employer-sponsored health benefits may be on the wane. After all, we now face the first recession since the Affordable Care Act created a marketplace that workers can go to directly, without their employer acting as an intermediary. Could this be a catalyst for employers to reduce or even eliminate their health benefits?

But let’s get back to the idea of bright spots. This week, EBRI and J.P. Morgan Asset Management released a paper based on connecting consumer and 401(k) data on a large scale. The collaboration is intended to develop an understanding of workers’ full financial picture by pairing their 401(k) activity (savings, investments, etc.) with their spending behaviors.  The initial foray into the research collaboration — “The 3% difference: What leads to higher retirement savings rates?” — explores what is driving the savings behavior of 401(k) participants who contribute at low, moderate, or high rates to their plans. It finds that spending patterns do indeed differ among the three groups — most interestingly between low and moderate savers, whose wages are actually very similar. Low savers are more prone to spend on transportation, housing, and food than moderate savers — at the potential cost of being able to save more. But, of course, the question is why? Future research will examine this in greater detail and ideally contribute to greater retirement and overall financial security by adding to a constructive dialogue on the forces behind U.S. workers’ savings habits.

Yes, it’s been a challenging year. But one thing that’s been reinforced by all that is happening is the importance of facts, not just inferred data, when it comes to tackling the most difficult issues we face today. Without facts, we cannot understand how to quarantine and for what length of time. Without facts, we also cannot determine how we can get American companies — and the economy — back on sound footing. EBRI remains dedicated to data and facts. We hope you join us in upcoming webinars and our end-of-month virtual Policy Forum to learn more about what these facts are telling us about the future of employment-based benefits and what policymakers, employers, and providers can do to support the well-being of American workers.

For more about joining EBRI, click here.


[1] https://www.ebri.org/retirement/publications/issue-briefs/content/impact-of-the-covid-19-pandemic-on-retirement-income-adequacy-evidence-from-ebri-s-retirement-security-projection-model

[2] https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7

[3] https://www.ebri.org/financial-wellbeing/publications/issue-briefs/content/emergency-fund-focused-employers-goals-motivations-and-challenges

https://am.jpmorgan.comus/en/asset-management/gim/adv/insights/what-leads-to-higher-retirement-savings-rates

Is COVID-19 Driving Americans to Retire Early?

One of the most surprising — and potentially puzzling — findings in the 2020 Retirement Confidence Survey (RCS) is how confident people remain even today, during the COVID-19 crisis, about their ability to have enough money to live comfortably throughout their retirement years.

The RCS was fielded twice this year: once in January 2020 before the impact of the pandemic was truly felt in the United States and again in late March as the pandemic was becoming a major factor in Americans’ lives. But if one expected retirement confidence to plummet with the stock market — it didn’t. Indeed, among American workers, 63 percent said in late March that they are somewhat or very confident, down only 6 percentage points from January 2020. For retirees, the change was even smaller: 76 percent said they are confident, down only 1 percentage point from January 2020. So why do people remain so confident?puzzle

One clue might be found in questions the RCS posed in March 2020 about employment status change. Eleven percent of survey respondents noted at the time that their employment status had changed in a negative way since February 1st 2020.  Another 12 percent noted that they expected their employment status to change in a negative way within the next six months. Among workers with a negative current or expected employment status change, retirement confidence was markedly lower. Less than half (47 percent) of this group believed they would have enough money to live comfortably in retirement. In fact, their confidence in everything from Social Security to Medicare to paying for long-term care expenses all tanked. In other words, it seems to be employment status, not stock market volatility, that is a driving force in retirement confidence. Thus, retirement confidence could certainly dive precipitously now that tens of millions of Americans are out of work due to COVID-19.

Logically, one might assume that, as a result of the financial implications of both job loss and market volatility, retirement horizons might expand due to COVID-19. However, there is now evidence showing that the pandemic might actually be causing the retirement horizon to contract. At least, that’s the conclusion of Coibion, Gorodnichenko, and Weber in their working paper, “Labor Markets During the COVID-19 Crisis: A Preliminary View.”[1]

According to the authors: “At the height of the covid-19 crisis with a much larger number of people now out of the labor force, we see corresponding declines in the share of homemakers, those raising children and the disabled. However, we see a large increase in those who claim to be retired, going from 53% to 60%. This makes early retirement a major force in accounting for the decline in the labor-force participation. . . this suggests that the onset of the covid-19 crisis led to a wave of earlier than planned retirements.”

At a recent EBRI Research Committee call, reactions to this conclusion ranged widely.  Some were skeptical about the numbers, questioning whether people would really be in a financial position to retire as COVID-19 continues to ravage their defined contribution plans and emergency savings. Others wondered if people simply wanted to take Social Security payments early — and how detrimental that might be for their long-term retirement financial situation. Some pointed out that people could retire only to decide to jump back into the work force at some later time — the so-called revolving or reverse retirement plan — as they realized they missed the social interactions, etc. of the workplace. Finally, there was the consideration that perhaps COVID-19 really was causing a unique spike in retirement, albeit not for a positive reason: Older workers might simply be afraid of contracting COVID-19 or its variants by being in the workplace and prefer to retire, whether ready or not from a financial standpoint, rather than be exposed.

The RCS actually provides contradictory evidence relative to the findings of the Coibion et al. working paper. According to it, the median expected retirement age is 65 for those both with and without a negative or expected negative job status change. So clearly more research is needed here. In the summer, EBRI will field its Workplace Wellness Employee Survey and its Financial Wellbeing Employer Survey simultaneously to dig deeper into the realities of how COVID-19 might be changing the financial security of workers and the retirement landscape.


[1] Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber. Working Paper 27017. National Bureau of Economic Research.

Employers Who Help Employees in Need: Valued Employers, Indeed

“When it all closes in, there are only two kinds of people: best friends and everyone else.” — Emery LordConnectingtheDots

This quote struck home with me as I thought of employers’ role in helping workers through what is potentially one of the most challenging times in their lives thanks to the current pandemic. The impacts may be emotional, physical, and financial.

Here’s why: A number of years ago, my husband had an accident that put him in the hospital for a week and incapacitated him at home for several weeks after. My colleagues at work and my employer could not have been more supportive. Co-workers covered for me so that I could take care of my husband, and my employer allowed me as much flexibility in my schedule as I needed. After things got back to normal for me, I never forgot how my employer and colleagues helped me out when I needed it most, and I believe it inspired in me greater loyalty and productivity.

Such is the challenge many employers face today: How do they support their employees in the face of a global crisis — show they care — even as they themselves struggle to stay afloat?

The good news is that many employers have already set themselves on the road to help employees by offering financial wellness initiatives and, in particular, emergency savings assistance. That’s because, even before the pandemic, workers demonstrated challenges with affording emergency needs. We know research from the Federal Reserve shows that families with working heads aren’t saving adequately for emergencies. According to EBRI estimates from Fed data, only 20.1 percent of such families had liquid savings of more than three months of their family income. In other words, most workers were struggling with unexpected expenses even before the pandemic.

And employers were taking notice. According to EBRI’s February Issue Brief — from a survey fielded in 2019 — titled “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges,” more than 4 in 10 (43.6 percent) employers that expressed at least some interest in offering financial wellness programs said they offer (28.2 percent) or plan to offer (15.3 percent) an emergency fund/employee hardship assistance as a financial wellness initiative. Granted, much of what is being offered is in the form of more traditional approaches to emergency help, such as employee relief/compassion funds (44 percent). However, employers expressed considerable interest in more cutting-edge offerings such as sidecar or rainy day accounts. While only 8 percent of the “emergency-fund-focused” employers offered such products, nearly 1 in 5 emergency-fund-focused respondents (19 percent) said they were planning to offer rainy day accounts; another 29 percent expressed some interest in such offerings.

Still, not everyone is on board with employers offering emergency savings help; some have suggested that employers should concentrate on improving job quality and pay and not just on ways to make it easier for workers to save for emergencies. And indeed, the Fed report notes that while only 56 percent of adults with family income less than $40,000 a year said they are doing okay financially, 79 percent of those earning between $40,000 and $100,000 annually reported this to be true, and more than 90 percent of adults with income greater than $100,000 a year reported this. Further, in the current situation, varying income will clearly be a source of financial fragility. According to the Fed report, one-third of those with varying income said they struggled to pay their bills at least once in the prior year due to their varying income.

However, the counterpoint to this is the high incidence of employers who point out that many of their financially strapped workers are earning six-figure salaries. Underscoring this, the Consumer Financial Protection Bureau reports that while income is a predictor of financial behavior, both financial skill and financial self-efficacy are materially more significant predictors. In other words, financial stability is not just predicated on salary level but also on an individual’s skill and confidence in navigating their finances.

As such, employers’ efforts in providing emergency savings help appear well founded. In the “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges” Issue Brief, the number one reason for offering emergency savings help was improved overall worker satisfaction (44 percent). At a Financial Finesse employer conference, I noted that it was interesting that the primary motivation of employers appears to be altruistic. However, the employers in the room agreed that worker satisfaction is both altruistic and bottom-line oriented: Satisfied employees are loyal and productive employees.

Employee satisfaction can be difficult to measure. In contrast to the more than 4 in 10 employers that listed worker satisfaction as a reason to offer financial security initiatives such as emergency savings help, fewer than 3 in 10 said that employee satisfaction is used to measure their initiatives’ effectiveness. Meanwhile, the majority of emergency-fund-focused employers said they fully or partially pay for employees’ financial wellness initiatives, and they reported the average annual per-employee cost for initiatives to be $110.68. In short, if employers cannot connect the dots between improving overall worker satisfaction and offering emergency savings help, it will be difficult for them to justify paying for such initiatives.


To learn more about the latest trends in emergency savings help, join us on April 8 for a webinar on this topic.


 

The members of EBRI’s Financial Wellbeing Research Center understand this very well and are dedicated to EBRI’s mission of using empirical data to make those connections. Together, we are building a database of employee financial wellness initiatives and will explore how such initiatives move the dial on employee behavior in a variety of different ways. The goal is to provide research for employers as they continue seeking to make the case for assisting workers in need.

One more potentially pertinent quote about the current crisis: “I’ve got some bad news and I’ve got some good news. Nothing lasts forever.” (Kate McGahan). Well, perhaps one thing may last if my experience is any guide: Employees’ view of how their employers helped them navigate this crisis.

Consumers or Patients: The Role of Individuals vs. Employers in Health Care Spending Choices

In a roundtable co-hosted by EBRI and the Midwest Business Group on Health in Chicago last year, Boeing’s Jason Parrott and Walgreens Boots Alliances’ Tom Sondergeld debated how well various aspects of consumer-driven health care — such as deductibles and copays — were helping to control both costs and the value of health care services. The answer was clearly “not as well as we’d like.” And then the entire group challenged whether health care recipients are truly even consumers in the traditional sense at all. Are they not in fact patients? And isn’t there a fundamental difference between a patient and a consumer? This point was intriguing. When people are in need of health care, it’s because they are sick. And anyone who has ever been sick knows that the highest priority tends to be getting well, not shopping around for value-based services.

balance-billingIt’s a point Paul Fronstin and his co-authors underscore in their recent Issue Brief, “Cost Differences for Oncology Medicines Based on Site of Treatment.” Evidence from the data[1] shows that payments for infused cancer medicines in the commercial and employment-based markets are nearly two times higher, on average, when services are provided in hospital outpatient departments vs. physician offices. However, it is arguable whether patients are really getting two times the value. On the surface it seems there would be a difference. After all, someone referred to a hospital outpatient department to receive chemo might assume that this would be a better option than a physician office. What if they had a negative reaction to the chemo and needed emergency care? Wouldn’t it be better to be in a hospital outpatient office where an emergency room would be just around the corner vs. a physician office where it would not?

This thinking, however, is not necessarily on point. It is not correct to assume that hospital outpatient departments are actually located in hospitals. Generally, in fact, they aren’t, often having previously been physicians’ offices that were bought by a hospital. But even when hospital outpatient departments are located on a hospital campus, they can be as far as 250 yards away from the main building and still be considered hospital based. So in many cases, even if a patient receiving chemo in a hospital outpatient department needed emergency services, they would have similar transportation issues — i.e., needing to be transported to an emergency room — to a patient in a physician office.

Differences in pricing that do not necessarily align with quality of care, of course, extend beyond chemo costs, as I recently learned from personal experience. Both my husband and I required the same medical procedure recently, but since we have different primary care physicians, we were offered two very different recommendations for care. I was sent to a physician office; he was sent to a hospital outpatient department. Both procedures went well, with the only noticeable difference from the “consumer’s” perspective — mine and his — being that his procedure took longer and he was required to leave in a wheelchair. The other noticeable difference came when we saw our insurance claims. His was more than three times higher than mine.

Note that because both procedures were covered by our health care insurance, neither of us were particularly motivated to second-guess our doctors’ recommendations based on price. But what about based on quality of service? Perhaps it is lack of transparency that caused me not to question whether I was better off in a hospital outpatient department or a physician office for my procedure. Perhaps I just trust my doctor’s recommendation. But this is definitely not how I behave when I make other consumption choices. For example, I’m in the market for a new health club. So far, I’ve scoured website reviews, measured the distance from my house to health clubs, compared prices, and planned walk-throughs. The other day, in fact, I spotted someone wearing workout clothes near a health club and asked her how she liked the club.

It may be argued that consumerism when it comes to health care choices is evolving. In an EBRIefing on Consumer Engagement in Health Care Among Millennials, Baby Boomers, and Generation X, Paul Fronstin showed how Millennials are more likely than other generations to seek out cost information about health care, check the quality rating of a doctor or hospital before receiving care, talk to doctors about treatment options and costs, and try to find the cost of health care services before getting care. Further, in the recent EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey, members of high-deductible health plans were more likely than members of traditional health plans to demonstrate consumer research patterns such as those described above.

In the meantime, what can employers do to help? In the site of care Issue Brief, Fronstin et al. concluded that employer intervention should be a consideration and that employers could cut their drug costs nearly in half simply by shifting patients to physician office settings or negotiating site-neutral pricing for medicines. This suggests that seeking to turn employees into consumers of health benefits is not the only answer when it comes to controlling costs while maintaining quality.


[1] The analysis was based on 18,195 users of the top 37 infused oncology drugs prescribed to employment-based and commercially insured patients in 2016.

Lessons From Down Under: The Problem With Getting Half of the Retirement Equation Right

At this week’s Leadership Symposium at the Association of Superannuation Funds of Australia (ASFA) Conference in Melbourne I learned that things really are upside down in this part of the world.landdownunder

Susan Thorp of the University of Sydney was explaining how successfully Australia’s superannuation system had solved the retirement savings dilemma for Australians. And indeed, the statistics are impressive: According to ASFA, as of the end of June 2019, Australian workers had amassed nearly $3 trillion in the superannuation system.[1] A substantial number of them are beginning to enter retirement with significant balances.

About Australia’s Superannuation System

For those unfamiliar, since 2014, Australia’s superannuation system has required that Australian employers contribute 9.5 percent of workers’ pay into a defined contribution system similar to the United States’ 401(k) system. Workers must keep their money in the system until they retire or are disabled. At that point, individuals generally have tax-free access to their nest egg.

However, as Professor Thorp explained, the superannuation system has really solved only half of the retirement equation: While retirement savings in Australia is strong, “we absolutely haven’t solved the retirement spending dilemma,” she noted. She cited the following research on superannuation drawdown behavior: The majority of retirement withdrawals in the superannuation system are close to the minimum, and most retirees see their superannuation balance actually increase slightly in most years. If this continues, many Australians will die with substantial amounts of their savings unspent — and this is regardless of the size of the superannuation fund balance.[2]

That may sound like a nice problem to have — so much money in retirement that you cannot spend it all. But that’s really not what’s happening here. As EBRI’s research has noted about U.S. retirees in the current environment[3], Australian retirees seem to be hoarding their nest egg not because they want to but out of fear of longevity risk. Essentially, they are self-insuring so that they won’t run out of money as they age. That is suboptimal on many levels.

First, as Moshe Milevsky of York University pointed out in his presentation at the same symposium, the probability that even a healthy person will live beyond age 95 is extremely low, and budgeting for low-probability events isn’t very practical. It would be like setting aside $100,000 just in case someone is injured on your property and sues you.  Think of all the things you’d be giving up — vacations, a better house, a nicer car, higher-quality education for you or your family — in order to have that money sit in a bank account in anticipation of this highly unlikely event.

That’s essentially what these retirees are doing. They are resigning themselves to a lower standard of living in retirement after having accepted a reduced standard of living while working in order to save for retirement. Suboptimal indeed.

At the symposium, we brainstormed ways to help retirees tackle this dilemma. Some suggested it’s a math problem: Retirees are ill-equipped to figure out how to effectively spend their money and need guidance. Others suggested it’s a framing issue: Retirees continue to think of their nest egg as a balance, and when it comes to balances, growth is good. Instead, they should think about their retirement savings as an income stream and consider how sizable that income stream should be. Still others wondered if we were just all making a fuss about nothing. Maybe retirees are just happy having a tidy sum that they can eventually bequeath to their heirs.

One of the superannuation fund administrators pointed out that we tend to oversimplify the process of spending in retirement: Just as people have many needs along the way as they accumulate money for retirement, so the path to decumulation is not likely to be one-size-fits-all but instead quite heterogeneous.

EBRI’s Retirement Security Research Center (RSRC) has identified this exact dynamic as it has explored drawdown behavior in mining its empirical 401(k) and individual retirement account (IRA) databases and in examining data from the Health and Retirement Study. Members of the RSRC have concluded that it could help to develop retirement “personas” in order to identify the finite set of approaches that people take to spending down their assets — and to thereby best identify products, services, education, and policy that can support them. This could also involve adding a qualitative aspect to the research as well by actually talking to retirees about why they engage in the behaviors they do.

This is exciting work and immensely valuable: People both in Australia and in the United States work very hard for their earnings. They deserve to be able to spend it optimally throughout their lifetime. Of course, that also involves developing a consensus around what “optimal” means on an individual/household basis — as well as from a societal standpoint.


[1] https://www.superannuation.asn.au/resources/superannuation-statistics

[2] Andrew Reeson, Thomas Sneddon, Zili Zhu, Alec Stephenson, Elizabeth V. Hobman, Peter Toscas. “Superannuation drawdown behaviour: An analysis of longitudinal data.” Canberra: CSIRO-Monash Working Paper, May 2016.

[3] More specifically, EBRI’s 2018 Issue Brief found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent. Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median. https://www.ebri.org/publications/research-publications/issue-briefs/content/asset-decumulation-or-asset-preservation-what-guides-retirement-spending

Don’t Let Poor Communication Ruin Your Event

Fans of the TV show Modern Family may remember the episode where Cameron’s fundraising event was ruined because Mitchell forgot to send out the invites. Mitchell says, “I was going to mail the invitations, so I put them in the back of the van, but I put my gym bag on top. I feel terrible. I haven’t been to the gym in six weeks. And I ruined Cam’s event.”

That is how I felt the other night when I found out my ride-sharing driver did not know about an important benefit his employer made available to him. The driver was telling me about how his wife was on the verge of losing her car. She’d been out of work for a year, and now, having secured a new job, she feared she couldn’t get to it because her car was about to be repossessed. My driver needed $437.59 for car payments immediately, and he didn’t know what to do.

First, I was struck by how close that number is to a much quoted financial wellness statistic: According to Federal Reserve data, about a third of workers say could not generate $400 out of a rainy day fund to cover expenses in case of sickness, job loss, economic downturn, or other emergencies.

EBRI actually finds an even more dire picture than this. When calculating how much liquid savings families actually report is available to cover such expense levels, we calculate that of all families with working heads, only 20.1 percent had liquid savings of more than three months of their family income. Even if the threshold is reduced to 75 percent of three months of family income, only 25.7 percent of families with working heads had liquid savings in excess of this amount.

Employers and contractors, such as ride-sharing services, are taking note. According to EBRI’s recent Issue Brief, 2019 Employer Approaches to Financial Wellbeing Solutions,” employer assistance in creating emergency funds or meeting liquidity needs is on the rise. More employers with at least 500 employees and some interest in employee financial wellness initiatives reported offering payroll advances in 2019 than in 2018 (17 percent and 12 percent, respectively). More than a quarter reported offering emergency funds or employee hardship assistance. Nearly half (44 percent) offered an employee relief or compassion fund, 36 percent offered part-time donations or leave-sharing, and 35 percent offered matching contributions to employees’ personal accounts. Among those that already offer an emergency fund, the average number of such benefits offered was 2.5.

Unfortunately, these programs may be well-kept secrets. When I asked my driver if he was aware that his employer offered an app that would allow him to access his pay in real time, he was surprised. The app allows drivers to snap a photo of their electronic timesheet to show they worked and then allows them to cash out instantaneously, with the app depositing the earnings into their bank accounts. In other words, it was the perfect benefit for the situation in which my driver found himself, and yet he had no idea it existed. What a missed opportunity.

I know. Retirement professionals are groaning right now. Having such immediate payroll access could certainly have a bad effect on saving. But the reality is that if employers feel the need to provide emergency savings assistance of this type, they probably have evidence that their workers really need this help, and it would be useful if those who worked for them were aware of it.

The 2019 Retirement Confidence Survey suggests that poor communication about available financial education and help may be common. According to the survey, just a quarter of workers say they use their employer as a source of info, even though a majority say they would find workplace educational or financial wellbeing programs helpful.

I asked EBRI’s Financial Wellbeing Research Center members how they would recommend that employers communicate financial wellness initiatives effectively to employees.  They had a lot of ideas:

  1. Effective communication works in three directions: 1) top-down through executive support; 2) side-to-side with affinity groups and peer-to-peer; and 3) bottom-up with champions.
  2. Use technology to learn more about your work force, and target your communication based on what you learn.
  3. Meet employees where they are: generally speaking, electronic communication for tech-savvy workers or Millennials; group communication for Gen Xers and women; personal communication for Boomers and blue-collar workers.
  4. Treat your communication like marketing or advertisement: Use emotions such as humor to make it memorable, use repetition to make sure the message sinks in, and use multiple channels to have the message reach as many people as possible.
  5. Measure what is working and what is not working and adapt your communication strategy accordingly.

While EBRI’s recent Employer Financial Wellbeing Survey showed little consensus about what constitutes employee financial wellbeing, what approaches should be used, and even how success is measured, there can be no disagreement that to be effective, the programs need to be communicated. And by the way, we can all also probably agree that it is a good idea to hit the gym more than once every six weeks.

Additional Preventive Care Benefits Permitted Under High-Deductible Health Plans: A Game Changer?

EBRI Director of the Health Research and Education Program Paul Fronstin has been in the habit of saying — for many years now — that allowing additional preventive care benefits to be provided by high-deductible health plans (HDHPs) — such as insulin for diabetics — could be a game changer for the growth of such plans and similarly for health savings accounts (HSAs).

In a recent Issue Brief, Fronstin showed how growth in the number of HSAs and enrollment in HSA-eligible health plans appear to have been slowing. Examining data from EBRI/Greenwald & Associates, the National Center for Health Statistics, Kaiser Family Foundation, Mercer, and America’s Health Insurance Plans, Fronstin found that all of the surveys noted substantial growth in HSA-eligible health plan enrollment since HSAs were established in 2004. At the same time, the surveys also consistently found slower growth in HSA-eligible health plan enrollment more recently (since 2016).

Several factors may have been holding back growth in HSA-eligible health plan enrollments: the delay in the Cadillac tax, recent low health insurance premium increases, and low unemployment may have caused employers to hold off on plans to move to HSA-eligible health plans. In addition, research findings indicate that growth in HSA-eligible health plan enrollments may also be held back because what constitutes an HSA-eligible health plan does not provide employers their desired level of flexibility around the design of the health plan — specifically, the flexibility to provide benefits prior to when the minimum deductible for that year is satisfied.

gamechangerThat game changer may now be here. Last week, effective July 17, 2019, the U.S. Treasury Department and the Internal Revenue Service issued Notice 2019-45, which allows certain preventive care benefits to be permitted before an HDHP’s deductible is met. These include certain treatments not only for diabetes but for asthma, heart disease, hypertension, and other chronic conditions.

The 2018 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey supports the “game changer” theory.  According to that survey, HDHP enrollees are more likely to seek cost information than traditional plan enrollees and are more likely than traditional plan enrollees to exhibit cost-conscious behaviors. Specifically, HDHP survey respondents say that they have:

  • Checked whether the plan would cover care or medication (55 percent HDHP vs. 41 percent traditional).
  • Checked the quality rating of a doctor or hospital before receiving care (41 percent HDHP vs. 33 percent traditional).
  • Asked for a generic drug instead of a brand name (41 percent HDHP vs. 32 percent traditional).
  • Talked to their doctors about prescription options and costs (40 percent HDHP vs. 29 percent traditional).
  • Talked to their doctors about other treatment options and costs (37 percent HDHP vs. 31 percent traditional).
  • Asked a doctor to recommend less costly prescriptions (31 percent HDHP vs. 22 percent traditional).
  • Used an online cost-tracking tool provided by the health plan (25 percent HDHP vs. 14 percent traditional).

The Consumer Engagement in Health Care Survey further found that HDHP enrollees are more likely than traditional plan enrollees to report that they have major financial concerns, despite the fact that HDHP enrollees have higher incomes than traditional plan enrollees.  The report concludes that: “Concerns over the financial wellbeing of workers may be what’s holding employers back from adopting HDHPs more broadly.”

EBRI will continue to track the growth in HDHPs and in HSAs using its Consumer Engagement in Health Care Survey and its database of over 6 million HSAs to understand to what extent the new regulation truly is a game changer for such plans.

HSAs: The Convergence Between Health and Retirement

paul-fronstin-webBy Paul Fronstin, EBRI

The amount of money individuals may need to cover their health care expenses once they retire may be eye-opening for many of them. EBRI recently found that couples with long life expectancy and high prescription drug expenses could need as much as $363,000 to cover premiums and out-of-pocket expenses. Unlike in the past, the onus of saving for health care expenses in retirement has increasingly fallen on individuals as the number of employers offering retiree health benefits has dropped.

While most saving for retirement occurs in 401(k) and other defined contribution plans, in 2004, health savings accounts (HSAs) became another option for individuals. Unlike 401(k) plans, HSAs provide account owners a triple tax advantage. Contributions to an HSA reduce taxable income. Earnings on the assets in the HSA build up tax free. And distributions from the HSA for qualified expenses are not subject to taxation. Because of this triple tax preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan.

However, HSAs have some limitations when it comes to saving for health care expenses in retirement. First, compared with 401(k) plans, HSA contribution limits are relatively low. In 2019, workers with employee-only health coverage can contribute only $3,500, while those with family coverage can contribute $7,000. An additional annual $1,000 catch-up contribution can be made by those ages 55 and older. After 10 years, individuals can accumulate only about $68,000 if they have an annual rate of return of 7.5 percent. To the degree individuals take distributions from the HSA during their working years to pay their medical expenses because they have a high-deductible health plan, they will have that much less for health care in retirement.

According to the EBRI HSA Database, HSAs that were established in 2007 had an average balance of $8,384 at the end of 2017. Why was the average account balance so much lower than its $68,000 potential? Ninety percent of accounts established in 2007 took a distribution in 2017, only 10 percent of those accounts were investing their assets in something other than cash, and only 26 percent contributed the maximum amount allowed by law.

In the financial services marketplace, we are seeing a convergence between some of the largest HSA providers and retirement providers. In 2017, HealthEquity acquired 401(k) provider BenefitGuard, and Optum and Empower Retirement began integrating their HSA and 401(k) products. Fidelity already offers both 401(k) and HSA products. Fidelity found that individuals who contributed to both their HSA and 401(k) contributed an average of 9.9 percent, while those who contributed only to their 401(k) contributed 8.5 percent.

There is still a lot we do not know about the interaction between HSAs and 401(k) plans. How many individuals cut back on 401(k) contributions when they open an HSA? How many contribute the maximum to both accounts? And how does the presence of an HSA affect retirement income security? These are the kinds of questions we will be answering in the future as we explore the intersection between HSAs and 401(k) plans.