How do I make the most of my employee benefits?

Today’s business environment changes quickly as innovations create efficiencies like being able to have a meeting with participants across the globe. Even amid change, one fundamental truth remains the same: namely, that businesses need people to run. After all, business reflects a relationship between people. Because people are involved, employee benefits to keep workers healthy, happy, and engaged require adaptation as the world changes.

How have benefits changed over the past 20 years?

An employee benefits survey released in 2016 by the Society for Human Resource Management discussed five changes in employee benefits over the past 20 years. The survey highlighted a few changes, like how telecommuting and wellness benefits have increased while other once-popular programs like access to credit unions have declined. Here are the top five trends noted by the survey (1.)

1. Professional and career development benefits- A higher percentage of employers now pay for professional memberships or offer professional development workshops.
2. Wellness Benefits- In 1996, 54 percent of employers offered wellness resources. Today, the number has increased to 72 percent.
3. Retirement Benefits- The survey discussed the nuances of retirement plan benefits (i.e., whether a Roth 401k is offered), but one of the most important reasons, offering retirement preparation advice, has not changed, at 45% (1.) Why is this important? A 2015 Retirement Confidence survey noted an increase in confidence from a low between 2009 and 2013, saying that 58% of workers are very or somewhat confident that they will have a comfortable retirement (2.) While better than half, confidence levels have a lot of room to grow. Additionally, “only about half of private-sector workers participate in a retirement savings plan, Bureau of Labor Statistics data show.” (3.)
4. Flexible work arrangements- Only 20 percent of employees were allowed to work remotely in 1996. Today, 80 percent of employers allow this activity (1.)
5. Financial and compensation benefits- While covering a range of perks, the employee benefits survey notes large decreases in programs like employee discounts and credit unions (1.)

As benefits change, employees must draft a game plan to maximize the key features of employer plans. The best way to start this task is by understanding the basics of financial planning.

Basics of Financial Planning

Most people engage in some form of financial planning, whether they know it or not. For example, the FICA taxes withheld from your pay go toward programs like Social Security (not all workers pay into this program) and Medicare. Both address retirement needs like cash flow and senior healthcare. Current citizens must have medical insurance as part of the Affordable Care Act. Disability insurance is available as a benefit through the Social Security program.

Beyond retirement and healthcare, consider estate planning. States have rules in place to divide assets if you die and do not have a will.
To attract a qualified workforce, companies improve benefits with programs other than those social initiatives previously discussed.

As people work, we take advantage of the programs, expressing concern when benefits change or close, when premiums rise, or when our retirement plan matching stops. Concern surfaces when the change affects our daily lives. What about our wish to heighten and live the best life possible? This is where most people fall short. They live in the daily grind, existing in a comatose state from Monday to Friday, only to have it start over the following Monday. When the employee approaches the subject from the perspective of using benefits for improving his/her life and as a means of taking care of family, he/she finds that benefits address most financial needs. Following are a few common areas that work benefits may address:
• Retirement – Most workers have three avenues to pursue retirement savings. The first is Social Security. We have taxes taken from our paychecks and we expect to receive a benefit at retirement. The second choice is saving through a work-sponsored plan like a 401(k.) The last alternative is saving money on your own through a Roth IRA, a Traditional IRA, or an investing account.
• Healthcare Insurance – As mentioned earlier, the requirement to have health insurance has changed the way you must address part of your financial plan. Add in new vehicles like Health Savings Accounts, and the issue becomes even more complicated.
• Long-Term Care Insurance – Some employers provide long-term care. This is not a benefit to which everyone has access. Mid- to late-career employees find this a valuable benefit.
• Disability Insurance – This insurance replaces income if a worker is no longer able to conduct the duties of his/her position. Policy features vary for each institution but address an overlooked topic in the planning world.
• Life Insurance – Group life insurance is typically provided to employees at a low cost with a cap on coverage.

Three of the four topics listed above focus on insurance. Employers and employees should understand the purpose of insurance, transferring risk from the employee to another entity. In this case, the loss of income, long-term care expenses, and current healthcare costs are the transferred risks.

Your Financial Plan

You understand the idea behind the benefits and already have an elementary plan in place, but you wonder how your benefits may be leveraged.

First, we should gain perspective on directing the plan. Great plans start with an understanding of what is important and why it is important. Core value exercises, statements of purpose, and reflection on past events and future experiences all help create a fulfilling and happy life. After all, it is the point of leveraging our work and money.
Once you paint a clear picture of what a fulfilling and happy life looks like, address your current asset base and start asking questions. Are you saving enough? Are you exposed to unnecessary risks? If you die, how will your family be affected?

What better place to start addressing these questions than with your employee benefits? You don’t have a salesperson pushing you to buy a product. Your employer completed a competitive analysis, making the benefit economical. Access is normally easy to achieve upon employment; all you need to do is fill out the forms. The major pitfall comes in coordinating the benefits across your plan.

Points of Consideration for Benefits
• Here are a few points of consideration as you review current benefits and examine new possibilities for next year:
• Retirement – How much should you be saving? Does your employer have a 401(k)? If so, can you save enough to max out your contributions ($18,000 for 2017)? Can you make Roth contributions to your retirement plan? If so, it may make sense to create tax diversification by having some tax-deferred contributions and Roth contributions. How will you manage the assets? Will you use a manager, target date fund, or self-direct? Pay attention to the cost of the funds you use. The more you pay, the less you might play.
• Health Insurance – What plans are provided in your benefits package: PPO, high deductible? Estimate your costs for use of the plan. If you use a high-deductible plan, explore your health savings account (HSA) choices. If coordinated properly, you may be able to use the HSA as a retirement supplement. Review the benefits section of your employer’s website. Often, human resources (HR) will provide details about the plan. Do not hesitate to contact HR with questions.
• Long-Term Care insurance – Long-term care remains one of the most complicated financial planning topics. The industry has experienced significant changes, from increasing premiums on existing classes of policies to creating hybrid policies (usually a life insurance policy or annuity with long-term care riders). How much does care cost in your location? How long do you think you will need the care? If you use the group policy, will you need to be underwritten? Are you in good health? What care do you want? Does the group policy have a conversion provision? Do you plan to self-insure?
• Disability Insurance – Many young and mid-career individuals do not consider disability coverage, yet it may be one of the riskiest areas (i.e., not being able to work) of your life. Late-career parties worry less about disability because retirement is often close. Does your employer-sponsored policy cover short-term, long-term, or both types of disabilities? Does the policy cover occupational or non-occupational injuries? How long is the elimination period? Will your emergency fund cover the elimination period? Does the policy have a conversion provision in case you sever relations with your employer?
• Life Insurance – You likely already have basic coverage, usually one to two times your salary. What amount do you need? Do you have large amounts of debt or college funding needs? Be aware that most group policies are term and the cost of insurance increases as you age. Are you in good health? If so, extra coverage may be cheaper if you buy an individual policy. Does your group life insurance have a conversion provision to a permanent or individual policy?
• Other Possible Benefits
• Childcare – Does your employer provide childcare benefits? If so, is the facility close to work? Is the facility accredited? Are the staff employees of your employer? When does the facility open and close? Do summer programs exist?
• Spousal Career Aid – A few employers help spouses find jobs and seek employment. If your employer provides this service, talk to the program directors and find out what connections they have with the local community. This helps shorten the search.
• Sabbatical – Some businesses provide the opportunity for workers to enjoy additional paid time away from work outside normal vacation time. Do you understand your sabbatical requirements? Have you reviewed personal duties related to taking a sabbatical, such as renting your home or home maintenance while you are away (if you are taking an extended leave)? Will your work benefits be active during your absence?

Next Steps

Remember, you profit from employer benefits with no pushy sales tactics, economical prices, and easy access. The difficulty remains in coordinating the benefits across your financial plan. Here is a list of next steps:
1. Review what a fulfilling and happy life looks like for you.
2. Identify your financial progress toward goals that support your fulfilling and happy life.
3. Review your benefits to heighten and promote your goals.
4. Review your plan and benefits three months before open enrollment. This gives you time to evaluate changes to benefits, circumstances, and needs.
On a parting note, be aware that your human resources department will not likely provide advice about which specific benefit or service you should use. Your retirement plan provider, while likely providing great service, will also be limited in addressing some of these issues as well.

If you still feel overwhelmed, use the “contact me” link and let’s schedule a time to answer your questions.

 

WORKS CITED

  1. Dealer, Olivera Perkins The Plain. “5 ways employee benefits have changed in 20 years: SHRM survey.”com. N.p., 21 June 2016. Web. 11 Feb. 2017. <http://www.cleveland.com/business/index.ssf/2016/06/5_ways_employee_benefits_have.html>
  2. By Ruth Helman, Greenwald & Associates; and Craig Copeland, Ph.D., and Jack VanDerhei, Ph.D., Employee Benefit Research Institute. The 2015 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans’ Retirement Confidence, No. 413. April 2015. 11 Feb. 2017. https://www.ebri.org/pdf/briefspdf/ebri_ib_413_apr15_rcs-2015.pdf
  3. Puzzanghera, Jim . “America isn’t saving enough for retirement. Can that be fixed before it’s too late?”Los Angeles Times. Los Angeles Times, 27 June 2016. Web. 11 Feb. 2017. <http://www.latimes.com/business/la-fi-retirement-savings-plans-20160627-snap-story.html>

What is the right amount of student loan debt?

Simple; the answer should be $0, but for most families that is not a reality. So, the question needs to change: What student loan debt can I support?

First, a quick look at a few important numbers.

  1. The past few years have seen 70% of graduating students leave college with a loan (or loans) (1.)
  2. The average graduate holds $37,172 in student loan debt (1.)
  3. Fifty-nine percent of millennials do not know when their student loans will be paid off (1.)

How does this affect other financial behavior?

According to a study from Jake Spiegel, “we found that student loans do appear to have a small crowding-out effect on retirement savings.” In fact, using data from HelloWallet, Speigel found that each dollar of student loan debt results in a $0.17 decrease in retirement savings. Data from the Survey of Consumer Sciences revealed similar results, with a $0.35 decrease in retirement savings (2.)

A Navient report shares data showing that people are less likely to have children if they still have student loans (3.) This is the trickle effect of student loans. Less spending takes place because of higher debt that must be paid off. The same survey goes on to note that 32% of people who borrowed for college did not feel financially stable (3.)

From a behavioral standpoint, a lack of confidence often results in the halt of financial progress. Preserving and gaining a reasonable confidence level helps build financial momentum, leading to success. Student loans are a big factor inhibiting younger workers from building motivation and confidence when it comes to their finances.

What about after the loan is paid off?

In a separate but related article, Spiegel notes, “I found that workers who had paid off their student loans contributed nearly 12% more to their retirement accounts than workers who had not yet finished paying down their loans. This evidence reinforces our theory that there is significant interplay between student debt and retirement savings.” He goes on to discuss evidence compiled by HelloWallet that workers who do not have student loans spend less and save more for other priorities than do workers with student loans.

Even though the 12% increase helps retirement account balances, workers miss the compounding effect of higher contributions to retirement accounts from the start of their careers. As time passes, the differences between those who saved more versus those who did not create a widening gap because of this compounding.

Reality Check

The evidence clearly shows an inverse relationship between saving and student loan debt. However, most families cannot pay for college easily out of current assets or cash flow. Even if a family saves much of its income, competing priorities may take money away from college savings. The biggest competing goal: retirement, of course.

Joseph Hurley notes in a post on savingforcollege.com, “A realistic goal for many families is to aim to save 25% of projected college expenses” (4.) The article discusses a few of the assumptions behind the goal of saving for 25% of college expenses. One example reveals that, on average, a public four-year school offered $5880 in grant and tax benefits (4.)

Of course, the later a family starts saving, the more money it will need to put away every month.

The Right Amount

In an article posted last year, Mark Kantrowitz notes, “student loan debt is affordable if half of the after-tax increase in income that a student gains from obtaining a college degree is sufficient to repay that student’s loans in 10 years or less.” Mark continues, noting his rule of thumb later in the article that total student loan debt at graduation should be less than the starting salary of the student (5.)

The Chicken or the Egg

While Mark gives great information about how to gauge where you end, this information is most helpful to the parents of a young child, who have a longer time frame during which to save. What if you or your child will be attending college soon? Worse yet, what if you are in college now?

As you can imagine, the normal “save as much as you can” advice will not be new or groundbreaking. What students can do is start working during the summer months to amass funds for college. Since the admissions process is less focused on grades and more dynamic, emphasizing extracurricular activities, including work, will help in several ways:

  1. Acquire increased savings for college.
  2. Create experiences that students can use for writing admissions essays.
  3. Gain lifelong work skills that will be helpful in landing internships and possibly jobs.
  4. Increase confidence. A few students become nervous while asking questions about schools during visits or class. Universities are big and intimidating. A work history forces most of us to ask clarifying questions when we do not understand a task or situation. Gaining the confidence to seek clarification helps a young student make informed decisions.

In College Now:

  1. As noted before, start working to reduce the amount of student loan debt required for current or future semesters.
  2. Take stock of your current student loan debt. Are you on pace to meet the guidelines noted above? If not, are there similar fields of work through which you can increase your pay so the debt load will be serviced easily?
  3. Still feel overwhelmed? Start building a small emergency fund of $500-$1000. This small act helps address most emergencies after you graduate and gives you the freedom to aggressively start paying off your student loans.

Should you have questions or concerns, you can contact me at 317-805-0840 or ncarmany@thewatermarkgrp.com.

Sources:

  1. “10 Student Loan Facts College Grads Need to Know | Paying …” N.p., n.d. Web. 11 Feb. 2017. <http://www.usnews.com/education/best-colleges/paying-for-college/slideshows/10-student-loan-facts-college-grads-need-to-know>
  2. Speigel, Jake. “How Student Debt Affects Retirement Wealth.”Morningstar Advisor. N.p., 16 Apr. 2016. Web. 11 Feb. 2017. <http://www.morningstar.com/advisor/t/114659614/how-student-debt-affects-retirement-wealth.htm>
  3. Kitroeff, Natalie. “Four Ways Student Debt Is Wreaking Havoc on Millennials.”com. Bloomberg, 10 Dec. 2015. Web. 11 Feb. 2017. <http://www.bloomberg.com/news/articles/2015-12-10/four-ways-student-debt-is-wreaking-havoc-on-millennials>
  4. Hurley, Joseph. “The Magic Number for College Savings.”com. N.p., 08 Feb. 2017. Web. 11 Feb. 2017. <http://www.savingforcollege.com/articles/the-magic-number-for-college-savings>
  5. Kantrowitz, Mark. “Why the Student Loan Crisis Is Even Worse Than People Think.”com. Time, 11 Jan. 2016. Web. 11 Feb. 2017. <http://time.com/money/4168510/why-student-loan-crisis-is-worse-than-people-think/>