Jillian had the idea that we would tell her to stop eating out, stop using her credit card, and begin turning the lights off in every room of her house when she walked out the door. Much to her surprise, we focused our initial efforts on reviewing the way that Jillian was spending her hard earned dollars at work. In other words, we wanted to take an in-depth look at the insurance, retirement and supplemental benefit offerings available through her employer to help make sure she was using her dollars wisely. As we explained to her, being a good steward of her discretionary income is important, but we often find that employees tend to waste money on the wrong benefits or on benefits they don’t even need.
Options, Options and More Options
From life, identity theft, health, disability, cancer and critical illness insurance to divorce, pet and juvenile life insurance, many employees are bombarded with choices and the chance to purchase too much insurance. We find that younger employees tend to over insure themselves at a time when their risks are low whereas older clients cannot afford adequate coverage at times when they need it the most. This idea, in combination with the fact that Americans are not saving enough and are underfunded for retirement, creates a recipe for disaster. As an employer, you have an opportunity to enhance employee awareness about retirement readiness by initiating a discussion of how to most effectively utilize the dollars employees spend on appropriate insurance and redirect any savings toward their retirement nest egg.
Assess Long Term Goals and Immediate Needs
When faced with a limited amount of money to disperse between benefits, we would encourage your participants to assess their short, intermediate, and long-term needs. Although retirement probably does not make the list as an immediate need, we would argue that employees should take advantage of compounding interest and the time value of money concept. At the very least, they should defer enough of their paycheck to benefit from the company match and, ultimately, set a goal to defer at least 10% of their income. The sooner they start, the greater their chances of retirement success. This may mean choosing a less expensive, less benefit rich insurance option in the beginning of the employee’s career when they are less likely to need insurance benefits and delaying the purchase of long-term care insurance and ancillary products like cancer insurance until later in life.In Jillian’s case, we discussed her immediate need for vision insurance based on the fact that she only wears glasses while driving at night and does not require a new pair every year. We compared the cost of the vision insurance to the cost of an annual eye exam and biannual pair of glasses and determined it was a better use of her money to pay for the exam and glasses out of pocket and save the amount that she was spending on the insurance in her 401(k) account.
Weigh the Options
It can be tempting to enroll in the most comprehensive health insurance plan for fear of the medical unknown, and, it is true that roughly half the bankruptcies in the United States are caused by illness and medical bills. However, before deciding on an option, your employees need to take a good, long look at their individual medical history and needs and the plan design options that best satisfy those needs. For instance, does your health plan offer different tiers of coverage based on family status? If so, it may be more cost effective for an employee to enroll as a single individual and allow their spouse to enroll in coverage at his or her employer.
Does your plan offer a high deductible option paired with a health savings account (HSA)? An HSA works in conjunction with an insurance policy that has a high deductible, but low monthly premiums. The HSA allows employees to deposit money that they save each month in premiums into a pre-tax account where it grows tax-deferred and is accessible to pay for medical expenses as needed. The real bonus to an HSA is that, once you reach age 65, any money that you did not spend can be used for anything you want, including to help fund retirement.
It may also be in the company’s and the employee's best interest to offer a flexible spending account (FSA). An FSA allows employees to determine an annual amount to contribute to the account with pre-tax dollars. The money in the FSA can then be used to pay for qualifying medical expenses.
Arguably one of the biggest changes set forth by the Patient Protection and Affordable Care Act is the Health Insurance Marketplace (www.healthcare.gov). Even if you are offering your employees a health insurance plan that satisfies the federal requirements for coverage and affordability, the marketplace may still be a good reference for employees to assess the best plan for them. Additionally, even employees with prescription drug coverage should be encouraged to compare costs, especially if they have a condition that requires regular medication. Encourage your employees to keep costs low by comparing prices at competing retailers, utilizing potentially less expensive mail-order prescription services, and asking for generic medicines when available and appropriate. Finally, employees should take an in depth look at the true cost of the insurance offered and whether the services justify that expense. For example, if your employee wears glasses, but does not need a new pair every year, it may make more sense to opt out of vision coverage in lieu of paying for his annual eye exam out of pocket.
After our discussion, Jillian realized that the best use of her hard earned dollars for her current situation would be to maximize her contributions to her company's 401(k) while choosing an insurance option that covered her needs and did not over insure what she did not need. Jillian feels this strategy will help her better prepare for retirement, and her employer is also grateful to have an employee who is a good steward of her money now, which will lead to a better employee in the future.
Trent A. Grinkmeyer, CRPC, Valerie R. Leonard, AIF, and Jamie Kertis, QKA, AIF
Trent Grinkmeyer, Valerie Leonard, and Jamie Kertis are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Grinkmeyer Leonard Financial or CES Insurance Agency. Grinkmeyer Leonard Financial, 1950 Stonegate Drive, Suite 275, Birmingham, AL 35242, (205) 970-9088.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the authors do not necessarily reflect the stance of Asset International or its affiliates. The persons portrayed in this example are fictional. This material does not constitued a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial adviser should be consulted.
« New DC Thinking Based on DB Best Practices