Time to Revisit the Work Relationship

I read an article the other day highlighting some findings from a Willis Towers Watson survey. Quoting from the article:

Yet only 25% rank contributing to a health savings account (HSA) as a top current financial priority, falling below saving for retirement in a 401(k), paying for essential day-to-day expenses and paying off debt. The survey found the majority of employees (69%) who didn't enroll in an HSA said they chose not to because they didn't see the benefit, understand HSAs, or take the time to understand them.

Let's think about the hidden part of what is being said there. The relationship between employers and employees has changed. As two factions battle for dominance in what that relationship should look like -- those who preach self-reliance think that employers should provide availability of savings options only and those who preach mandated pay and benefits think that the only differentiators should be things like office gyms and juice bars -- we are left in a world where creativity is encouraged, but not in any determination of how employees are rewarded.

If you were to take a survey of which benefits employees find the most important (many have, but I can't put my hands on one right now), I suspect that numbers one and two would be their health benefits and their 401(k). Why? The data that I cite above shows that most don't understand their health benefits and having worked in the retirement space for more than half my life, I can tell you that the large majority don't understand their 401(k) either. Many understand what it is, but relatively few understand what it's not.

So much for the people who preach self-reliance as in 2018, those are two benefit types that are the epitome of self-reliance.

Let's turn for a moment to another side of the equation -- pay. The other side of the spectrum would have us believe that as an employer, you are not particularly entitled to differentiate between employees based on much of anything because if the data suggests that any two employees are paid any differently from each other and it is even remotely possible that maybe someone in their wildest dreams could divine that those differences in pay are based on something that the law doesn't or shouldn't, in their opinion, allow, the company is in trouble.

Suppose we were to scrap the current system. Suppose different companies offered different benefits that their employees could understand. Suppose they paid employees based on the value they brought to those companies (yes, I know that value is nigh impossible to measure).

In the thought to be antiquated employer-employee relationship that existed 30-35 years ago, consider what we had:

• Companies were generally nicely profitable;
• Employees tended to stay with the companies that they worked for at age 35 until they retired;
• Those employees, generally speaking, lived as well as or better in retirement than they did while they were working;
• Health benefits were such that employees didn't go into debt to pay their share of them from every paychecks; and 
• Neither the country nor its citizens were reeling in debt.

I also see data that tells me that more than half (usually about 55%) are on track to retire. Translated, that means that nearly half are woefully behind. That's not a success. That is an utter failure.

The experiments of employee self-reliance and of paying everyone the same because you're not allowed to pay them differently have been failures. More likely than not, they will remain failures. 

Perhaps it's time to see what was right about the employer-employee relationship in the 80s and bring it back. Let's aim for 100% of employees being on track to retire. Let's aim for benefits that employees use because they do understand them. Let's pay people that deliver value in the workplace. It is time to revisit the work relationship.

Perhaps Employees Just Don't Want HSAs

I read an interesting article this morning whose focus is to tell the reader that health savings accounts (HSAs) would be more popular if people only understood them The article was based on research from Fidelity that shows that most eligible Americans (those enrolled in a high-deductible health plan (HDHP)) don't understand the benefits of HSAs. In fact, that part of that research is likely correct.

But, despite that research, I think the answer goes deeper than that.

Before digging in, let's review some of the key features of HSAs:

• The money in your HSA can be used to pay qualified medical expenses.
• Money in your HSA that is not used in a calendar year simply stays in the account, unlike in a Flexible Spending Account (FSA).
• The account is yours. It goes with you if you change employers, are unemployed, retire, or just don't feel like deferring anymore.
• You can generally defer to an HSA in a year that you participate in an HDHP.
• There is a triple tax benefit from HSAs: money goes in tax-free, assets grow tax-free, money coming out for qualified medical expenses comes out tax-free.

So, what's the problem then? Which of those bullets do people not understand?

In my opinion, it;s more than that. I've done exhaustive -- well maybe not exhaustive -- research by just talking to people about HDHPs and HSAs. I don't ask them to rattle off the benefits of them, but I do ask them why they don't choose to use them. Here are some typical answers.

• People don't like high-deductible health plans. When we consider that most Americans do not have enough in savings to get them through a 2-month work stoppage, they certainly don't want health insurance that may not cover them for the first one or two months of pay's worth of medical expenses.
• When we consider that a typical employee's paycheck is already being "raided" by federal income taxes, state income taxes, FICA taxes, health benefit costs, 401(k) deferrals, and other benefit costs, there may not be enough left over for the day-to-day costs of living let alone HSA deferrals.

HDHPs and HSAs were put into place as part of a move toward health consumerism. In other words, patients will be more conscious of how they spend their dollars if the money for other than catastrophic health expenses is coming out of their accounts.

Let's think about what has happened because of this. An HDHP participant gets an annoying cold. He doesn't seek medical treatment because he is being a "smart consumer" of health services. Wait, it's not just a cold. It's bronchitis or influenza and suddenly, the costs are higher and his condition has spread as he has infected family members. That's not a good outcome.

Here's another plausible scenario. Another HDHP participant watches his daughter limp off the field during a youth soccer game. Her keen home-grown injury detection skills don't think there is anything broken, so they just decide to ice down the injury because experience has told them that the cost of a medical examination of it might be several hundred to even a thousand dollars. Oops, the injury turns out to be more serious than anyone thought. Our heroine should have taken her daughter to the doctor because now there are complications.

I'm not saying that the Fidelity research was flat out wrong. But, there's something more than people not understanding the benefits of HSAs. My conclusion is this:

People don't want to understand the benefits of HSAs. If participation in an HDHP is an entrance requirement, your average participant just doesn't care about the possible benefits of a health savings account.

The HSA experiment is now almost 15 years old. The concept of health consumerism is far older than that. Theoretically, it works. Theory and reality don't always agree.

Blip Theory -- The Downfall of 401(k) Outcome Theory

Most of the non-regulatory material that I read about 401(k) plans these days deals with participant outcomes. In fact, outcome seems to be one of the big buzzwords for 2014. We are suddenly talking about financial outcomes, health outcomes, and every other kind of outcome you can think of.

Don't get me wrong, I think it would be great if we all have wonderful outcomes. I just don't believe the studies that tell us how to get there.

In the typical piece that I read, I learn that in order to get the best outcomes, participants should begin saving at the beginning of their working career, increase the percentage of their pay that they save over time and convert their account balance (one way or another) to an inflation-adjusted annuity for longevity protection.

That's great. And, when a smart person models what will happen if a young adult follows this guidance, that person will always be destined to have a highly prosperous retirement.

But, it seems that very few people, even those who started saving when they were fairly young, are actually on target to have that very prosperous retirement.

Why not? What happened?

Life happened.

None of these models seem to reflect real life. In real life, people have periods of unemployment. During that unemployment, they stop saving. In fact, to the extent that those people have not also saved well outside of their 401(k), many will need to take distributions from those very 401(k) plans (paying income tax and the early distribution excise tax) just to stay afloat.

Where is this event in the models?

In real life, many young people actually do start to save at a modest rate and gradually increase the amount that they save. But, in real life, many of those people choose to have children and some will have them without having made a truly conscious decision to do so. Kids cost more money than anyone seems to think they will. That increase in savings rate often fails to be sustainable.

Where is this event in the models?

In real life, in 2014, an awful lot of people participate in high-deductible health plans. They are told that one of the great tax benefits of the modern world comes to people who put money away in a health savings account (HSA) to fund the high deductible part of their plans. This is a great idea as well, but real wages have not been increasing for probably the last 15 or more years. This model expects participants to save upwards of 10% of compensation in their 401(k) plans and an additional, say, $4000 per year in their HSAs. That's a lot of money. I think more people than not would tell you that this is just not feasible.

Where is this conundrum in the models?

Purchasing an in-plan annuity or taking an annuity distribution in your 401(k) is often an excellent idea. But, not all plans have them. Among those that do, many are not offered on a particularly favorable or attractive basis. The models that I have seen use a current, no-profit basis for converting your account balance to an annuity.

Where can I get one of these annuities on which an insurer makes no profit?

I'm all for wonderful outcomes. But, somebody needs to merge blip theory with outcome theory. Under blip theory, and I have never heard the term used before the morning of January 17, 2014, just as the road to hell is paved with good intentions, the road to wonderful outcomes is paved with potholes hereinafter known as blips. When models start including realistic numbers of blips, I'll start to believe the expected outcomes.

IRS HDHP Notice that Had to Be

Yesterday, the IRS published Notice 2013-57 confirming that a High Deductible Health Plan (HDHP) can, in fact, still be an HDHP if it offers preventive health care without being subject to the deductible. The IRS got this one very right, despite Congress having missed a few technical details.

Here's the rub. The Affordable Care Act (ACA, PPACA, or ObamaCare) clearly contemplates HDHPs and health savings accounts (HSAs). The law tells us all of the following:

• For an individual to make (or for the individual's employer to make on the individual's behalf) tax-favored contributions to an HSA, the individual must participate in an HDHP.
• Further, the HDHP must not pay any benefits to the individual until the [high] deductible is satisfied.
• The ACA requires that a health plan must provide first dollar coverage for certain preventive care services.

Thankfully, the IRS made a completely reasonable decision. It determined that those benefits that must be provided should not preclude the use of an HSA. IRS went further by saying that anything that is preventive care under Notices 2004-23 or 2004-50 is preventive care for this purpose whether or not it is specified as preventive care under the ACA.

Phew! And, you were worried that this little glitch was going to blow up ObamaCare.