Opportunity arises out of crisis

When 17,000 union workers at General Electric Co. staged a two-day strike in January, they were protesting not only ballooning health insurance costs but also an increase in yearly health coverage fees for 25,000 early retirees.

The brief walkout was a clear sign that increasing corporate efforts to shift costs for medical care – including outright elimination of benefits at some companies – had become a major issue for retirees.

The GE strike also underscored a ripe business opportunity for financial planners and investment advisers.

More and more retirees need help with the daunting challenge of paying for health care. Yet so far, very few in the advisory industry have moved into the gap to serve them.

There also is a related need among the rising number of companies that are restructuring their benefits for retirees and setting up defined-contribution investment accounts as a solution.

“This remains a gray area in financial planning that is at the fringes, and no one is really dealing with it,” says Frank Jaffe, a certified financial planner with Access Wealth Planning LLC in Clifton, N.J.

Mr. Jaffe says he is seeing a rising incidence of stress on retirees’ finances because of inadequate resources to handle health-care costs.

“It’s a huge issue,” adds Richard Stumpf, president of Financial Benefits Inc. in Wichita, Kan. “Right now, the average age of someone retiring is 62, and the trend is down. That’s not the age you want to be shopping for a health insurance policy.”

The problem soon could become an epidemic.

Trying to cope

Medicare kicks in at age 65, but there are huge financial gaps in Medicare coverage, including significant cost-sharing provisions. Meanwhile, it includes no coverage of prescription drugs, a huge expense. And early retirees may face substantial health-care-funding needs before they reach 65.

A couple retiring today at age 65 would need about $160,000 in savings to cover their retirement medical expenses, assuming that they do not have an employer-sponsored plan, according to a new study by Fidelity Investments.

This figure covers the Medicare premium, cost-sharing expenses and the cost of services not covered by Medicare.

For a couple retiring today at age 60, the typical cost would mount to more than $200,000. Including comprehensive long-term-care coverage beginning at age 65 would increase these estimates by about $130,000.

There is still sufficient time for baby boomers 55 or under to plan for and fund retirement medical costs, the Boston group’s report notes.

And there is growing hope for government creation of tax-favored funding programs aimed at retiree health care. In the meantime, retirees and their employers alike are trying to cope with the status quo.

For Americans retiring today, a big problem is simple ignorance about the burdens they are likely to face.

Providing for post-employment medical care typically has been way down on the list of concerns of would-be retirees. But now it must be shoved way up on the list, near pension income, the usual No. 1 concern, says Mark White, senior consultant in Washington with Watson Wyatt Worldwide, a benefits consulting firm.

“A lot of people are going to be surprised by the way their retiree medical benefits play out, because up to this point, the information that’s been provided is relatively minimal on the part of many employers,” he says. “It may be too late for a lot of financial adjustments for these people – other than working longer.”

The advisory community’s challenge is “to reach out in a mass-market way to provide accurate information” that would help, says Mr. White.

“Advisers should be getting into this business if they don’t have it on their radar screens,” says Eric Parmenter, practice leader for compensation and benefits consulting for Grant Thornton LLP in Chicago. “There will be millions of dollars that should be invested in this.”

Setting up buffers

The seeds of the problem were sown a decade ago by the adoption of Financial Accounting Standard 106, which requires companies to accrue and expense retiree medical liabilities. Adding to the problem have been ever-rising medical costs.

Employer financial support will shrink to less than 10% of total retiree medical expenses by 2031 under plan provisions already adopted by many employers. That compares with the more than 50% of total expenses paid now by typical large employers, according to a recent study of 56 large employers by Watson Wyatt.

About 20% of employers studied already have eliminated retiree medical plans for new hires altogether.

More-generous companies may set up buffers such as tax-advantaged retiree medical accounts and health reimbursement accounts.

These are employer-funded arrangements in which participants have an individual account to cover insured or self-insured medical care. The unused year-end balance can permissibly be rolled over to future years.

About 5% of employers already have adopted HRAs since the federal government approved them last summer, but that proportion may grow to 30% over the next few years, says Mr. Parmenter.

Tens of thousands of self- employed individuals and owners of companies with up to 50 employees have tax-advantaged medical savings accounts, which function like individual retirement accounts.

Congress is expected to expand MSAs by allowing them to be established for larger employers as well. “Most companies are already reeling from increased pension costs,” says Ethan Kra, chief retirement actuary in New York with Mercer Human Resource Consulting LLC. “The last thing they’re doing is implementing a retiree medical funding program.”

That leaves more and more retirees on their own.