As health care benefits fall out of favor with employees, some small businesses are considering redesigning their 401(k)s to retain staff.
If you have small-business clients who are moving to lower-cost health care coverage structures, perhaps now is a good time to talk to them about how to reinvest those savings. Namely, by putting it back into the 401(k).
Recent data from the Nationwide Retirement Institute revealed that 64% of small-business owners said their employees consider health care benefits less attractive in light of the Affordable Care Act, and 43% of these employers are stepping up their contribution to retirement plans to counterbalance this and retain staff.
In fact, employers are feeling generous with respect to their retirement plans because 44% said there's now a greater need to offer employee benefits compared to the days before the ACA. The Nationwide Retirement Institute polled 334 small businesses with 50 to 299 employees.
“The point is that these employers are shifting and increasing the level of benefits toward retirement plans to help retain and attract new employees,” said Kevin McGarry, director of the Nationwide Retirement Institute. The ACA "opens a new opportunity for the adviser; employers want advice on the impact of the ACA on their business — how they can care for their employees and bring in and recruit new employees.”
The discovery positions retirement plan benefits — and not health care benefits — as the new competitive field for employers who are looking to hire new recruits.
GOOD TIME FOR PLAN REDESIGN
Advisers who work on the 401(k) side of the business have varying reports on where their small-business clients land on the cost relationship between health care benefits and retirement plans.
Jeffrey H. Snyder, vice president and senior consultant with Cammack Retirement Group, reports that his retirement plan clients are actively pursuing plan design changes that will add auto-enrollment features and matches.
“It may be a direct result of going to high-deductible health care plans,” he said. “Clients are realizing the value of retirement plan programs, and the focus for the last five to six years has been on health care. The pendulum is shifting.”
Mr. Snyder noted that he's not privy to the overarching financials of his employer clients, so they don't get into the weeds with him on how resources are allocated to pay for employee benefits. But clients are constantly seeking ways to save money and redirect those resources to the retirement plan.
Redesigns to help save money might include reducing the match cost by having vesting schedules, wherein employees have to stay for a certain length of time to be entitled to a greater share of profit-sharing money or other funds the employer sets aside. Those who leave early can have their forfeited sums go into a forfeiture account. That money can help offset expenses related to the company match, Mr. Snyder said.
“If you save on other voluntary savings, then that money can be reallocated toward your own organization in terms of compensation for the benefits staff or projects like redesigning the retirement plan,” he added.
The smallest employers — those with fewer than 100 employees — are still grappling with health care costs, according to Keith Olshove, senior vice president and managing director of the retirement plan investment and consulting group at Old Mission Investment and Trust Cos.
Some who are managing to cut back their expenses in the health care department are reinvesting those dollars in related benefits. “With a high-deductible health care plan, they might provide additional funds to the HSA,” Mr. Olshove said. “I see most of them doing that before they take the savings and look at the retirement account.”
EMPLOYEE-LEVEL SAVINGS
There is still plenty advisers can do from the employees' point of view to encourage contributions into the retirement plan.
Jim Phillips, president of Retirement Resources, said he has come across employers who are reluctant to ramp up their retirement savings plans out of fear employees are shouldering more out-of-pocket responsibility for their health care.
“They told us not to set the goals too high because they thought the fact that they loaded more costs to the participants would keep them from putting money into retirement savings,” Mr. Phillips said.
Employer warnings aside, Mr. Phillips still was able to get a large pickup in contribution rates for this particular plan. The firm continued its educational program, nudging employees about the necessity of having a pool of assets in retirement and finding ways to save the additional dollars. Where the money came from to bolster participant savings, however, is a whole other issue.
“Maybe the angle is that when it's on an individual level, it's not just a fixed pool of dollars that goes to either health care or retirement savings, then maybe it's more dynamic,” Mr. Phillips said. “People will realign their budgets and take the money away from something completely unrelated.”
WEIGHING DUAL FUNDING NEEDS
Chatter in the employee benefits space suggests that employers may have a pool of dollars that they will allocate toward workers' health care or retirement benefits. In that case, it may be up to the employee to decide whether more of those designated employer contributions will go toward funding current health care needs or retirement savings for the future.
As innovative as the concept is, it opens up a new can of worms.
“That's another potential wrinkle on the whole issue,” Mr. Phillips said. “How well-educated are the participants about those choices? How will people be helped to make those decisions?”
