Most employees buy more health insurance than they need and save less for retirement than they should, according to a recent study from the TIAA Institute. This study provides a cautionary tale for millions of employees making benefits decisions during open enrollment.
Researchers studied four years of data from a large university to identify mistakes employees made in their health insurance and retirement savings decisions.
Half the people in the study opted for health insurance plans with higher premiums and lower deductibles even though 99.8% of them would have saved money in lower-coverage, higher-deductible plans. This mistake cost employees an average of $1,700.
Dr. Elizabeth Cote, chief mission officer and medical director at MyHealthMath, thinks it’s a mistake to call these decisions mistakes; instead, she said, suboptimal decisions reflect inefficiencies in the market.
“A mistake means that you have the ability to make a correct decision and that you messed it up,” Cote said. In the case of health insurance selection, most people don’t have the necessary tools to find the right answer, which can often only be derived from sophisticated analysis.
Making the right health insurance decision requires understanding the details of available insurance options and unique individual factors, such as a consumer’s health risks and likelihood of needing healthcare services. Without historical data and robust statistical calculations, predicting those needs accurately—and identifying the best insurance plan to meet them cost effectively—can be nearly impossible.
“There is a right answer,” Cote said, “but to get there you need to be able to do the math.”
Cote knows firsthand how difficult this math is. Her company analyzes an average of 8,000 data points per employee to provide individualized health insurance recommendations. The employees they work with save an average of $1,300 when they switch to the optimal insurance plan.
But many people do not switch, despite the savings potential. Often, they cannot afford to expose themselves to a deductible or fund a health savings account (HSA).
“People are not stupid,” Cote said. “They’re financing their fear.”
Fear of unexpected expenses is well founded; 69% of Americans who receive surprise medical bills report difficulty paying them, and 11% cannot pay surprise medical bills at all.
To avoid unknown out-of-pocket costs later, people are willing to overspend on health insurance today. These decisions may be necessary, but they also make it harder for people to achieve longer-term financial health.
In the TIAA study, employees who overspent on health insurance were 23% more likely to forego employer matching contributions to their retirement accounts. Overall, 80% of employees did not save the recommended amount, and one-third made no voluntary contributions at all. The same people who were spending too much on health insurance premiums every month were saving too little for retirement.
Not taking advantage of employer matching contributions is one of the biggest financial mistakes people make, according to Steve Pilloff, assistant professor of finance at George Mason University School of Business.
“Even partial matches, such as 50 cents for every dollar saved, provide employees with free money that they should be grabbing with both hands,” Pilloff said.
But many employees feel they cannot afford to save for the future.
“Economic hardship can derail even the most prudent planning, especially today,” said Scott Schleicher, senior financial advisor at Personal Capital. “Folks can feel very tight on cash and don’t think they have anything left to save after covering basic expenses.”
Beyond cash constraints, employees also face psychological barriers to saving for the future.
“The choice to save for retirement is a choice between current consumption and future consumption,” said Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University. “Our present selves tend to win over our future selves.”
The same phenomenon applies in health insurance decisions.
“Avoiding risks now has much more primacy than reaping benefits later,” Cote said. “People like to have a clear idea of what they’re paying than to be surprised by something that they are afraid they can’t afford.”
Locking in healthcare costs through higher premiums even if it means paying more overall may reflect prudent caution or a lack of financial resilience to absorb future expenses. Whatever the motivation, consumers are paying a premium for certainty.
The pandemic may be exacerbating risk aversion in both health insurance and retirement decisions.
According to the 2020 Northwestern Mutual Planning & Progress Study, 42% of Americans say they’re less willing to take financial risks, favoring protecting their assets over pursuing higher returns.
Aditi Javeri Gokhale, chief commercial officer and president of investment products and services at Northwestern Mutual cautioned against letting emotions drive financial decisions.
“Throughout the Covid-19 crisis, knee-jerk responses to volatility and election-related headlines have shined a light on the need for a comprehensive financial plan,” Gokhale said.
The TIAA Institute data suggests that Americans can benefit financially from steeling themselves for the risks and discomfort of uncertainty.
Higher-deductible health plans may help employees free up money to invest for retirement. For all but the people who know they will need significant levels of healthcare services in the coming year, this approach may pay off in the long run.