With more workers focused on their financial security due to the pandemic, a new white paper contends that biases toward certain health plans can lead to overspending, which can affect workers’ overall retirement readiness.
“Depending on their health care utilization, we found that the average employee would have spent between $500 and $2,500 more throughout the year—which is money a person could be saving for retirement, contributing to an HSA or putting aside for an emergency,” explains Andrew Frend, SVP of Health Solutions Product and Strategy.
The findings are contained in the white paper, “Retirement at Risk: The relationship between overspending on health care and retirement readiness.”
Voya observes that there are several different factors that employees must consider in determining whether a preferred provider organization (PPO) or high-deductible health plan (HDHP) is the best fit for an employee, including the employee’s expected health care utilization for the year. There also are a number of factors that need to be considered on the retirement side, such as whether they have an employer match and whether the employee elects to invest their contributions and subsequently how those investments potentially perform, as well as the tax implications.
Still, the paper notes that assessing these different factors can offer insight into how a different health plan selection could affect savings for the future. As an example, it offers an illustration of what could happen if a 40-year-old individual retiring in 25 years turned their annual savings from choosing an HDHP over a PPO into annual retirement account or HSA contributions.
Under the example, the individual could have chosen to spend $481 and gotten the PPO, or spent the money on something else. Alternatively, the individual could have improved their retirement savings by taking that $481 and contributing $617 (the pre-tax equivalent assuming the 22% marginal federal tax bracket) to a pre-tax account.
Voya found that the 40-year-old employee could have an additional $35,863 (before taxes) at retirement in 25 years if they spent $481 less on health care costs each year with an HDHP and made pre-tax contributions toward retirement instead, assuming a 6% return with 0% employer match and a lump-sum withdrawal in retirement. For a plan with a 100% match, the estimates show that the additional retirement value accumulation rises to over $70,000 (before taxes).
Underlying Bias
Part of what is at play here, according to the Voya researchers, is that employees often have an underlying bias against HDHPs, when compared to more traditional health plans like a PPO. This can lead to employees unnecessarily overspending on health care with funds that could have been used for contributions to a retirement plan or an HSA.
In one part of the study, participants were presented with two different plans and told to think of them as identical in quality of care, access to care and all other features beyond cost. The only difference in the HDHP versus PPO plans was the premiums and deductibles.
Nearly two-thirds of study participants (65%) chose the PPO plan—even though the study was purposefully designed so the HDHP would always be the optimal financial choice. Consequently, Voya suggests that there are three key reasons to help explain this decision-making mindset:
- Naming of the plan has influence on enrollment: Participants were almost twice as likely to choose a PPO plan over an HDHP when the phrase “high deductible” is used in the plan name (65% PPO vs. 35% HDHP). This preference noticeably lessens when the plans are unbranded (53% PPO vs. 47% HDHP), the paper notes.
- Inertia among employees to “set and forget”: Nine in 10 respondents (89%) said they just pick the same health plan from the prior year, especially those enrolled in a PPO versus a HDHP (94% vs. 80%, respectively).
- General aversion to deductibles: Nearly two-thirds of participants (63%) said they would pick the plan with the lowest deductible.
“High costs, combined with the complexity of choosing the right plan, can make health care decisions difficult for employees—many of whom are already struggling to save for retirement,” notes Rob Grubka, chief executive officer of Health Solutions for Voya Financial. To help address these issues, Grubka points to a recent Voya study showing that more than 7 in 10 employees (73%) said they are interested in guidance and support tools that would help them understand how much money to put aside for retirement, emergency savings and health care expenses.
