Recently, Barron’s published a comprehensive history of 401k plans titled “The 401(k) Is Turning 40. We Looked at The Good, The Bad and The Future.”
As someone who has worked for more than 30 years with thousands of 401k plans, including those from some of the best companies in the world (Apple, AT&T, IBM, John Deere and Northwestern Mutual), I tire of hearing 401ks are “broken.”
They’re not—however, our approach to funding our retirement should evolve to respond to changes in our economy and culture.
Auto-portability and Multiple Employer Plans (MEP) are good ideas to help address perceived deficiencies in existing 401k plans, but they will have limited impact in one major area of retirement concern: health care.
The average retired couple today can expect to spend $280,000 on health care.
Where does it come from now? A substantial amount is taken from 401ks.
Most retirees 40 years ago enjoyed continued health care coverage from their employers, in addition to Medicare. You would be hard-pressed today to find many employers who offer retiree health care benefits.
HSAs: One potential solution
A solution to the health care threat is expanding the contribution limits to Health Savings Accounts (HSA). Workers are provided access to HSAs if their employer offers a High Deductible Health Plan (HDHP).
Although not intentionally designed to do so, these triple tax-free accounts can be used in concert with 401k plans and IRAs to provide an effective approach to funding nearly every American’s retirement.
And many workers who don’t have access to 401ks have access to HSAs.
The public often confuses HSAs confused with Flexible Spending Accounts (FSA).
FSAs have a use-it-or-lose-it provision—spend everything contributed to an FSA in a particular year or forfeit those dollars. HSAs do not have that requirement.
Dollars remaining in HSAs at retirement can be carried forward to pay Medicare premiums, long-term care insurance premiums, COBRA premiums, prescription drug costs, dental expenses and, of course, any co-pays, deductibles or co-insurance amounts for an individual or spouse.
Current contribution limits are too low
Maximum annual HSA contribution limits (employer plus employee) for 2019 are modest—$3,500 per individual and $7,000 for a family.
An additional $1,000 in catch-up contributions is permitted for those age 55 and older.
There doesn’t appear to be an end in sight to rising health care costs. As a consequence, studies show more retirees will be bankrupted by high health care expenses.
Proposals have been issued to increase the amount of allowable contributions and make usage more flexible.
Why not increase HSA contribution limits to the same level as 401(k) limits ($19,000 for 2019 plus $6,000 in catch-up contributions)?
It’s time for Congress to act to help American workers by raising HSA contribution limits—significantly.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.