Scared Into Saving: Spell Out Healthcare Costs to Boost 401k Contributions

New method of encouraging saving is seeing big results

401k, retirement, health careEnough with the guesswork.

It’s new, it’s improved and, most importantly, it works.

While pointing to tax perks, incorporating auto features and rolling out financial wellness programs are common techniques used to influence 401k plan participants to save more, industry professionals may want to consider a different approach.

A recent white paper from HealthyCapital is encouraging plan advisors and sponsors to try an innovative and effective new method of motivating participants to save more for retirement.

According to findings published in Health & Retirement Savings: Leveraging Health Care Costs to Drive 401k Contributions & Improve Health, “when the projected costs for a specific goal—[such as] meeting health care needs in retirement—are shared, the average employee increases their 401k contributions by as much as 25 percent.”

By assessing healthcare cost data based on 70 million actual medical cases, HealthyCapital has created fintech and healthtech tools capable of predicting out-of-pocket healthcare costs based on conditions.

Its newest tool, the “Health Management Retirement Funding Index,” paints a vivid picture for participants about how making healthier choices (i.e., losing weight or quitting smoking) and investing the savings that would otherwise be spent on medical expenses can impact their retirement outlook.

“We can actuarially determine the savings and life expectancy benefits individuals can achieve by effectively managing their health and making small behavioral changes,” Ron Mastrogiovanni, CEO of HealthyCapital and HealthView Services, said in a statement.

“When employees are provided with personalized cost data related to something as important to them as health, they are more likely to take action than when we ask them to save more for retirement in general.”

In one case study from the white paper, HealthyCapital explains that a 50-year-old man who is diagnosed with high blood pressure or type 2 diabetes would save around $2,000 per year in out-of-pocket healthcare costs pre-retirement, and add three to eight years to his life expectancy by making a few behavior modifications and taking prescribed medications.

In another, the paper notes that a 45-year-old woman diagnosed with type 2 diabetes and high cholesterol could lower her annual pre-retirement out-of-pocket healthcare costs by more than $3,300—and add eight years to her life expectancy—by better managing her conditions. If she contributes the savings to her 401k, assuming a 6 percent return, her balance at retirement would be $108,000 higher.

Applying the Index, the white paper expands on the latter example.

At age 65, it notes, the woman would have 45 percent of the savings she would need to cover her projected healthcare costs in retirement. This takes into account an adjustment to her anticipated longevity, now age 84 compared to age 76, based on the assumption she begins managing her health. The calculation also considers costs based on Medicare Part B and D premiums, supplemental insurance (Plan F) and additional out-of-pocket expenses. Long-term care, however, is left out of the equation.

“The Index underscores the magnitude of savings possible through health condition management and frames them in terms of what we know is a driver of retirement savings – future health care costs,” Mastrogiovanni concluded.

“Since employers pay on average around three quarters of their employees’ health premiums, the financial gains for self-insured employers of improved health are a multiple of the benefits for employees. The lower expenses for employers offer opportunities to provide wellness support and financial incentives to further encourage healthier behaviors and savings.”

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