Employees who overpay for health insurance tend to under-save for retirement: TIAA

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Employers have an opportunity to help employees avoid making common mistakes in health insurance and retirement savings choices, thereby improving employee well-being and maximizing their long-term financial stability, according to a new study by TIAA Institute.

The TIAA analysis correlated two studies — one on mistakes employees make when choosing health insurance plans and another on retirement savings mistakes — to see if employees who make mistakes in one domain also make mistakes in the other.

Understanding correlations in mistakes across domains can help employers create targeted interventions during open enrollment and educate employees about shifting spending in one area to a better option in another area to their benefit, the study said.

Employee health plan decision-making

The study of a large university’s administrative data over four years found a large majority of those studied selected one of the two more expensive health insurance plans offered, even when lower costs are more likely in the cheapest plan.

This is a common mistake that leads to employees overspending on health insurance by nearly $1,700, the study said.

The analysis used individual-level claims data and found that for more than 99.8 percent of its sample, the lower-coverage plan should be chosen because lower spending outcomes are more likely.

“Notably, the greatest spending differences are at low levels of health care costs; this may be contrary to people’s intuition, as they may believe that, in case of catastrophic spending outcomes, they would pay much more under the low-coverage plan,” the study said.

In reality, high deductible plans would be exhausted in case of a catastrophic event and the out-of-pocket maximum was similar in all three plans offered, meaning spending outcomes in those situations were similar across all plans offered.

Employee retirement plan decision-making

The study also found that a large majority of the sample it studied do not save for retirement in defined contribution plans at a rate needed to reach 15 percent of salary each year.

And about one-third do not make any voluntary contributions at all, leaving potential employer matching dollars on the table.

Furthermore, the analysis found that employees who make mistakes in one domain tend to make mistakes in both.

Overall, the largest segment of employees includes those who make mistakes only in the health insurance domain, while the smallest segment includes those who make mistakes only in the retirement domain. About one-third of employees make mistakes in both domains and 5 percent don’t make mistakes in either domain.

With many employees overpaying for health insurance while undersaving for retirement, there is an opportunity to shift resources from one to the other to benefit the employee, the study said.

“Policies that can steer consumers to use premium savings from lower health insurance payments to fund retirement accounts have the potential to produce sizable welfare gains to workers,” the study said.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.

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