Data & Research October 6, 2022

Millennials May Be Headed Towards a Rocky Retirement, Research Shows

The Pension Research Council at Wharton Business School published findings that suggest millennials will likely have lower relative retirement savings than previous generations.

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Millennials may have a harder time maintaining their standard of living due to a variety of factors, according to research from the Pension Research Council at the Wharton School of Business at the University of Pennsylvania.

At a glance, there is reason for both pessimism and optimism. Among early millennials, male labor force participation is down from past generations, with 89% of men born from 1986 to 1990 in the workforce, compared to 96% of those born 1941 to 1945.

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Rates of marriage and homeownership are also down. Those without a spouse are more at risk for income insecurity during retirement since they cannot bundle resources with their partner and are ineligible for various government benefits afforded to married people. Lower rates of home ownership make it more difficult for early millennials to accumulate wealth that they can liquidate or borrow against during retirement.

The authors note, however, that early millennial women have higher earnings and education from past generations, though the labor force participation rate of women born from 1981 to 1985 (73%) is about the same as women born from 1971 to 1975 (76%). The shrinking life expectancy gap between men and women should also lower the widowed rate, an important factor since widows are particularly at risk for retirement insecurity.

The study focuses in on adults born from 1980 to 1989, dubbed “Early Millennials.” To project future economic metrics that allow them to predict millennial retirement security such as income, wealth, inflation, and cost of borrowing, the researchers used the Urban Institute’s Dynamic Simulation of Income Model. The model relies on household surveys, and tries to estimate the number of people who will get married, lose a spouse, lose a job, have a child, or any number of other factors that could influence retirement security.

The authors set clear parameters for inadequate retirement savings. Retirement income is inadequate if it falls below 25% less than the projected national average annual income, or if it fails to replace 75% of pre-retirement wages. Retirement income that equals or exceeds average annual income is adequate regardless of replacement rate.

They estimate that 38% of millennials will have inadequate retirement income, compared to 28% of those born 1937 to 1945. This finding also assumes that Social Security will continue to pay out at its current rates, even though it is expected to have to cut benefits in 2035 due to insufficient assets. In the event that Social Security is not reformed, and benefits have to be cut, retirement insecurity among millennials would rise to 49%.

Early millennials retiring by age 70 will have a higher income than past generations but face higher retirement insecurity due to higher costs of housing and out-of-pocket healthcare expenses, as well as longer life expectancies.

The authors also note that there are stark differences among racial groups and educational categories among millennials, with Hispanics and those without a high school degree being among those most at risk for retirement insecurity.

The authors write: “Inadequate retirement income is especially prevalent for people of color, people who did not attend college, people who never marry, and people with limited lifetime earnings. We project that, among Early Millennials, 53 percent of Hispanic adults, 42 percent of Black adults, 66 percent of people who did not complete high school, 45 percent of people with no more than a high school diploma, and 50 percent of people who never marry, will have inadequate income to meet basic needs at age 70 or maintain their preretirement living standards. Additionally, 64 percent of people in the bottom quintile of the lifetime earnings distribution are projected to have inadequate income at age 70.”

The millennial generation is also more unequal than past generations in this respect due to increasing income inequality. Between the “pre-boomers” (those born 1937 to 1945) and early millennials, income from the bottom quintile has increased by about $3,000 in inflation adjusted dollars, vs. $62,300 in the top quintile.

Much of the increased precarity of millennials is due to income inequality among their generation, even with the rapidly narrowing racial and gender gaps in retirement security noted by the authors.

Data & Research October 5, 2022

Best Practices for Providers to Boost HSA Invested Assets

While health savings account assets have reached near $100 billion, account holders’ invested assets have increased slowly.

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Health savings accounts assets have risen steadily but providers could more effectively boost their use, a new Morningstar report finds.

The 2022 Morningstar Health Savings Account Landscape report finds that while HSAs have grown at a “blistering” 31% rate over the past 15 years, “plenty of workers do not take full advantage of HSAs’ triple tax-advantages.”

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“The actual usage of [HSAs] could improve by the users, [because] only 9% of accounts had invested assets in them,” explains Tom Nations, associate director, multi-asset and alternative strategies, at Morningstar. 

Invested HSA assets are $26.4 billion in 2022, an increase from $4.5 billion in 2017, according to the report. Total HSA assets were $98 billion in 2021, an increase from below $50 billion in 2017 and under $25 billion in 2014.

HSA contributions are tax-deductible: investment growth, interest and dividends are tax-exempt; and withdrawals for qualified medical expenses are tax free. HSAs are only available to individuals with qualifying high-deductible health plans.

Account holders can invest savings in investment menu lineups, that grows over time, like in a 401(k) or employer-sponsored retirement plan to cover qualified medical expenses.  

Fidelity Investments estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement.

The Morningstar report finds that high-deductible health plans covered 28% of workers in 2021, up from 4% in 2006.

“[For] HSAs as investment vehicles and opportunities for growth for medical expenses, currently, in the near-future and then in retirement, that advantage is less on the table to a certain extent,” says Nations, the report’s author. “That [HSAs have] grown so rapidly and 91% of accounts aren’t using the investment feature means there’s pretty good runway ahead.”

While HSA account providers have significantly improved, since 2017, Nations explains, there remains much room for providers to incorporate best practices. “Most notably, fees could come down across the board,” he says. 

The report finds that the average expense ratio for all funds offered is 31 basis points.

The report also finds that HSAs still have confusing features and needless friction for account holders to invest assets. Among the HSA provider best practices recommended by Morningstar to boost their use, the report urges that providers ditch investment thresholds, reduce fees and continue to cull investment lineups.

Providers’ improvements may effect overall greater use and specially, investment of HSA assets, says Nations. 

“We would like to see more improvement on investment thresholds,” says Nations.

Many HSA providers require account holders to seed the account with cash and meet an investment threshold before investing the assets.

“We think that there shouldn’t be requirements and the best practice would be to not require that,” he says. “A lot of these providers have moved that down to zero or even reduced their investment threshold amount but some still have them and we’re looking to see a little bit more progress on that.”

Nations explains that providers can also improve the process for ‘onboarding’ HSA new user accounts, because many of the products separate the investments from spending features.

“[Many] times [HSA’s are] actually two separate accounts: there is a spending account and the investment account,” says Nations. “If you sign up for an HSA, what you’re actually signing up for is the spending account only and then if you fund it, you need to take the additional manual step of opening up the investment account, tying it to the spending account and then funding the investment account after funding the spending account.”

Friction for investing assets may add inertia, blunting account holders’ investing their assets, he adds.

“[There are] these additional hurdles and sludge, that really complicates the process,” Nations says.  “Whereas, in theory, if you opened an account and it offered you access to both right off the bat and made it clear that this was an available option, you might see higher adoption of the investment account and more than 9% of accounts using that feature. There is a benefit to doing it right at the front while people have it fresh in their mind as opposed to ‘oh, I have an HSA but I don’t know how to actually get it set up and invested.’”

Providers have culled their investment menus, as a tactic to improve the user experience, he says.

Large investment menus that offer duplicate strategies, asset classes and strategies may “lead to analysis paralysis, where you’re offering dozens and dozens of funds that overwhelm the end investor [and] nothing gets done,” says Nations.

Whereas Morningstar recommends providers offer between 12 and 24 funds, the average number of investments offered is between 17 to 30 funds, he adds.  

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