Are HSAs the answer to millennial retirement savings?
Ask a millennial what financial wellness means to them and you’re bound to hear about paying off student loans, and not worrying about the high cost of rent. Retirement doesn’t even make the list — but it should.
Research by Merrill Lynch and Age Wave says 42% of millennials have no retirement savings at all. That should concern employers; every year that an employee delays retirement can cost large companies as much as $3 million, according to a Prudential study. Employers are in a unique position to help millennials take advantage of programs suited to their needs.
“I think [millennials] have a plan to plan for retirement,” says Deborah Culhane, CEO of Optum Bank, a financial services unit of Minnesota-based health and wellness company Optum. “They may not be the most active generation saving for it, but I think they’re concerned about it.”
Employee Benefit Adviser spoke with Culhane about retirement strategies for millennials, and how employers can best communicate them to their workforce.
Employee Benefit Adviser: We’re seeing that young workers aren’t saving enough — or at all — for retirement. What are employers doing to help with this problem?
Deborah Culhane: I think one of the trends is diversifying benefit packages to focus on things millennials specifically want. I’ve seen a plethora of student debt relief programs and a variety of other ways people are trying to help this generation get on the path of financial security — like access to financial planners and financial wellness classes. It makes sense because part of focusing on retirement is having the ability to focus on where you stand today.
EBA: What programs should millennials invest in for retirement?
Culhane: Without a question — especially when you achieve employer match status — the best step to save for retirement is the health savings account because you’ll never be taxed on it. The 401(k) gets taxed pretty heavily, and the only tax benefit it receives is deferment. I think the HSA is better than any IRA, or anything else on the marketplace. Taxes for all the other programs are deferred, but the HSA is never taxed. It’s the most productive way to save for retirement.
If you’re trying to help employees achieve a level of financial security, these plans — regardless of where you are on your journey — are invaluable. They can help [employees] now for paying medical expenses, and they can help them save for future retirement expenses.
EBA: Interesting. But young workers sometimes shy away from the HSA because of the high-deductible health plan requirement. Why do you think it’s a good match for them?
Culhane: I think there’s a misconception about that; you actually get to control more of your healthcare spending under high-deductible plans. If you’re relatively young, healthy and active, these plans are many times the most financially obvious selection because they have lower premiums. If you’re paying less in premiums, you can save more in your HSA.
I think these plans are attractive to younger, healthier populations because of their value to retirement. Also, if you’re just starting a family, this medical account is critical for you because it helps pay for medical expenses at non-taxed dollars. For example, if you need glasses, you can pay for them using tax exempt dollars that never go away. Flexible spending accounts typically expire every year.
The beauty of the HSA is it’s yours, it’s portable, it goes with you from job to job and it’s never taxed if it’s used for qualified medical expenses. It’s one of the most misunderstood, but also one of the most flexible benefits in the marketplace.
EBA: 401(k) matches are usually considered a desirable employee benefit. Can this be done with HSAs?
Culhane: Employers can contribute to HSAs, too. It’s very similar to the 401(k) as far as matches go. I’ve seen various programs offer a lot of matches and extra incentives that an employee can utilize for their account. For example, there are many companies with health challenges. Employers will actually contribute additional dollars to an employee’s HSA account for passing some health challenge — usually like taking a fitness class or signing up for a program. It’s an incentive to get employees to take charge of their health, which will save employers money on medical expenses. And obviously, it helps increase employee retirement savings.
EBA: What’s the best way to educate and engage millennials so they’ll consider participating in an HSA plan?
Culhane: Whatever approach employers take, it needs to be a simple plan design, and incentives need to be effectively deployed. I think generally people are overwhelmed in benefit selection, and they don’t understand how they fit to their own personal needs.
That’s why the most effective education is a personalized education.
What we deploy are very short, intuitive video-based guides. We use these a lot in our new mobile app, which uses artificial intelligence to suggest content to our users. We try to engage people in the app because that’s when they’re focused on benefits. It’s where we can create that moment that helps them take that next step.
After they watch a video on HSAs being used for long-term savings, we use the app to reach out to the employee saying, “Did you know you can start investing in retirement?” They can engage with the platform and watch short, educational videos that explain how the HSA can help with long-term savings and medical expenses. Our algorithm knows your spending habits, and if you have relevant medical information, it’ll nudge you to the next best step on your financial security ladder.