Health Care Plan Selection Can Hamper Retirement Savings

Voya finds that HDHPs paired with HSAs are often a more optimal choice for participants than PPOs.

In “Retirement at Risk: The Relationship Between Overspending on Health Care and Retirement Readiness,” produced by Voya’s Thought Leadership Council and SAVVI Financial LLC, the two companies report that the average time employees spend enrolling in benefits, including health plan selection, voluntary benefits and more, is a mere 17 minutes. They say that the selection of a health care plan is critical and can impact what funds participants have remaining to invest in a retirement plan.

“Employees make a number of quick decisions during annual enrollment,” the report says. “While selecting options like health care and voluntary benefits, they may be considering the question, ‘What do I expect to need in the year ahead?’ The question they’re not likely to be asking, however, is, ‘And what will the impact of this choice be on my savings and spending in retirement?’”

Voya and SAVVI Financial say it’s crucial that a participant select the right health care plan for them, or for their family, as “health care costs are rising twice as fast as incomes, putting pressure on how much employees are able to save for retirement.”

Retirement savings, on the whole, are paltry for many Americans, they say, pointing to the Employee Benefit Research Institute (EBRI)’s “2020 Retirement Confidence Survey,” which found that 35% of Americans say the total value of their savings and investments, excluding the value of their primary home, is less than $25,000, and, of this group, 18% have less than $1,000 in savings.

What Employees Should Be Considering

Voya and SAVVI Financial say the two most commonly selected health care plans are preferred provider organization (PPO) plans and high-deductible health plans (HDHPs), which are typically paired with health savings accounts (HSAs) or health reimbursement arrangements (HRAs). PPOs have higher premiums but lower deductibles, while HDHPs are the opposite: lower premiums but higher deductibles.

In order to make the right health care plan choice, Voya and SAVVI Financial say, participants should be asking the following questions: How likely is it that I will make a medical claim? What is the out-of-pocket cost if I do? Does my employer make a contribution to the HSA? How does my tax bracket impact my overall savings?

According to the U.S. Agency for Healthcare Research and Quality’s “Medical Expenditure Panel Survey,” in 2018, nearly 60% of employees had less than $2,000 in claims, and 16% had no claims at all. This would suggest, the report says, that for the majority of workers, an HDHP with lower premiums would be a better choice than a PPO with higher premiums.

SAVVI Financial analyzed the data and found that for those 25 to 34, 84% would have spent less on health care with an HDHP, 78% of those 35 to 44 would have spent less, 67% of those 45 to 54 would have spent less and 69% of those 55 to 64 would have spent less.

How much would they have saved each year with an HDHP? The savings would have been $566 for those 25 to 34, $481 for those 35 to 44, $395 for those 45 to 54, and $326 for those 55 to 64. Those figures were for people seeking individual coverage, and the amounts would have been even higher for family coverage, Voya and SAVVI Financial say. “Compounded over time, if this amount were to be saved for retirement, it has the potential to have a significant impact,” the report says.

A 40-year-old retiring in 25 years who takes the savings he earns from selecting an HDHP over a PPO and puts it in an HSA or retirement account with a 100% employer match would have $71,000 saved by age 65, and $36,000 even if the account had no employer match.

So why do most employees choose PPOs rather than HDHPs? Voya conducted a study last year in which it told participants that the HDHPs and PPOs they were seeing were “identical in quality of care, access to care and all other features beyond cost. The only difference in these two plans was the premiums and deductibles.”

What Voya found is that when the HDHPs were branded as “high-deductible,” nearly two-thirds of study participants chose the PPO, despite the fact that Voya has found that HDHPs are the better choice for 75% of individuals. In real life, the Kaiser Family Foundation found that only 31% of employees are enrolled in an HDHP.

Voya says employers can help convince more of their workers to check the HDHP box by removing the words “high-deductible” from the plan name. They suggest using labels such as Gold, Silver and Bronze instead.

Voya also learned that employees tend to stick with whatever they already selected, with 94% of those who previously elected a PPO remaining in one, and 80% of those with an HDHP sticking with that. Voya says employers should encourage their workers to review their plan each year by requiring them to re-enroll. They could also equip their workers with decision support tools that explain with figures how workers could benefit from investing the money they saved by selecting one plan over the other.