In Part 1, I sought to help RIA readers understand the importance of selecting and rethinking a healthcare employer benefits option that should serve more as a “healthcare-in-retirement” account.
A Health Savings Account provides triple tax-free benefits; a unique feature that makes maximum annual funding to subsidize rising health-care costs in retirement, a no-brainer. Non-catastrophic current healthcare expenditures should be accounted for in a household budget, thus allowing the HSA to accumulate over time.
I reviewed the importance of taking advantage of employer-based long-term disability coverage; there’s a greater chance of becoming disabled than dying. To ignore this option is clearly reckless financial behavior.
Flexible Spending Accounts may be available for dependents and are ‘use it or lose it’ in nature.
Part 2 covers additional benefits. The following choices are not perfect. For most households, additional coverage will be required.
It’s customary for employers to offer one-time annual salary life insurance as a freebie. AD&D or accidental death & dismemberment coverage as an add-on to traditional life insurance coverage may also be paid 100% by an employer. AD&D may cover death or the loss of a limb, eyesight, speech or hearing due to an accident.
I’m shocked by how many workers, especially those with dependents, who take the bare minimum when it comes to life insurance. Employers generally offer supplemental life insurance up to four times annual salary inexpensively with evidence of insurability. To determine how much life insurance is required for your personal circumstances utilize the life insurance calculator available at www.lifehappens.org. Better yet, establish a meeting with your financial partner to determine what your family requires.
Life insurance decisions must not be made in a vacuum. For example, I find that employees who do a commendable job purchasing life insurance for themselves, fail to consider the financial impact to a household at the loss of dependent spouses. Some policies offer dependent life insurance however, it’s generally inadequate to cover dependent spouses who remain home with children; it may be considered partial coverage at best.
According to Salary.com in their 19th annual Mom Salary Survey, a stay-at-home mother commands annual compensation of $162,581, up nearly $5,000 from 2017. For couples with young children who do not have the financial resources to hire a live-in caregiver, additional life insurance coverage will be mandatory to mitigate the risk of losing a dependent spouse for as long as children require assistance.
The greatest disadvantage of employer-provided life insurance and long-term disability options is lack of portability. In other words, lose your job, lose your coverage. Do not be lulled into complacency because life insurance is offered by your employer unless you’re in a rare career situation where job security exists. At Clarity, we assist workers to assess their insurance needs through holistic financial planning and suggest additional life insurance to compliment benefits offered by employers.
Retirement plan review time:
It’s possible your company retirement plan falls short – no match, limited choices, but it is what it is.
Open enrollment doesn’t necessarily include deadline decisions about an employer-provided retirement plan. However, take 30-40 additional minutes to review your investment mix, fund selections and current contribution rate.
Side note: According to MetLife’s 2018 Employee Benefit Trends Study, 70% of employees would be interested in converting sum or all of their retirement savings into lifetime income. Most employers offer defined contribution plans such as 401k plans.
In the good old days, in the ancient times of pensions (first time I heard the word ‘pension’ was during a rerun of an episode of The Little Rascals from the mid-1930s), the employer solely bore the risk of saving and investing for a worker’s retirement. In other words, you were provided an income for life in retirement as an employee of the organization for a specific period of time.
Bluntly, as shareholder greed and technology made workers less of an asset and more of a liability, the responsibility of saving for retirement was placed one-hundred percent on the shoulders of the employee.
In a 401(k) you, the employee, takes on high fees, limited investment selections and the risk of possible devastating stock losses, especially if over-allocated to company stock. A common pitfall is to ignore asset allocation and allow the stock portion of a portfolio to deviate dramatically from the emotional capacity to stomach volatility.
Tread carefully with target date mutual funds.
In 2007, the Department of Labor placed a stamp of approval on target-date fund choices in 401(k) plans so plan providers have been quick to embrace them.
A target date fund is a mix of asset classes – large, small, international company stocks and fixed income that is adjusted over time or allocated conservatively the closer an employee is to the ‘target date’ identified.
For example, the Vanguard Target Retirement 2020 Fund is designed to increase its exposure to bonds the closer it gets to 2020. Let’s be clear – this is NOT a maturity date, which is part of the confusion of a target-date fund. The target never gets reached. The fund doesn’t go away. It’s always out there.
Also, as a rational human, in 2020, the so-called retirement or target year, wouldn’t you intuitively think this fund should be a conservative allocation? Perhaps 30% equities and 70% fixed income? Well, it all depends on a target date fund’s ‘glide path,’ or method of how the allocation is reshuffled the closer the time to the target date. Every fund group differs in philosophy, so you must read the fine print.
For example, the Vanguard Fund takes seven years AFTER 2020 to shift from a 60/40 stock & bond allocation to a 30/70 bond & stock mix. In reality, this is a 2027 fund.
Target date funds are not the best, but suitable choices as most 401(k) participants treat their plans like pensions. In other words, they deposit money into them, ignore allocations and wish for the best. Once money is placed into 401(k) plans it seems to fall into a psychological dark hole and rarely monitored or rebalanced. At least target date funds allocate and rebalance on autopilot (employees don’t need to do anything).
A growing, positive trend – Workplace wellness plans:
According to the Kaiser Family Foundation’s Employer Health Benefits Survey for 2017, 58% of small businesses and 85% of large companies offer health and wellness promotion plans which include smoking cessation, weight management, behavioral and lifestyle coaching. It would be shortsighted to ignore enrollment in these programs. Why?
“Fifty-two percent of large firms with a health risk assessment program offer an incentive to encourage workers to complete the assessment. Among large firms with an incentive, the incentives include: gift cards, merchandise or similar incentives (50% of firms); requiring a completed health risk assessment to be eligible for other wellness incentives (46% of firms); lower premium contributions or cost sharing (46% of firms); and financial rewards such as cash, contributions to health-related savings accounts, or avoiding a payroll fee (40% of firms).”
Keep in mind, most wellness programs are offered throughout the year. However, many employees seem to focus on them on a limited basis or during open enrollment in November.
As I mention often, an employer’s benefits program is the first line of defense against financial vulnerability.
If you require an objective assessment of your employer’s benefits package and how to maximize options, do not hesitate to reach out to us here.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter.