Facing Medical Costs

The retirement plan advisers of today face a dilemma. They find themselves at the corner of “Full Disclosure Drive” and “Self-Interest Avenue.” What has blurred the lines between full disclosure and questionable business practices? Since when has educating the client moved from the good-business-practice column to the possibly questionable one?

First of all, can full disclosure be used to blur the lines of self-interest? It most certainly can. Large expenditure items, such as hedging for 30 years in retirement or longer or the need for long-term care, must be at the forefront of any financial or retirement conversation. Any retirement planning or retirement readiness conversation needs to include the topic of health care. A retirement planning strategy today must incorporate a full-disclosure discussion around the needs associated with health care in 2014 and beyond.

We have grown up being inculcated to believe that we enjoy the most advanced medical care available on the planet. Up until now, we have flourished in a medical treatment “land of plenty,” where all you needed was a job, medical insurance or cash, for the best health care known to man to be at your fingertips.

We know that the consumption of health care services, and the corresponding expenses for any treatments, is back-end loaded for the average American. The overwhelming majority of health care expenses for most Americans will occur during the last six months of life. Anyone who has observed the slow death of an aged American—and who has also viewed the corresponding medical bills—is well aware that six-figure-expense days can repeatedly occur during the final month of a prolonged hospital stay.

Accepting the above as fact, since it occurs more times than not, some investment companies have sponsored research that incorporates the need to fund such expenses within an individual’s retirement savings calculation.

Should All Information Be Disclosed?

Does introducing the reality of health care consumption and the corresponding costs during the final years of one’s life need to be addressed in a retirement planning conversation? Or should those fees, the corresponding calculations and the funding of such future expenses be addressed in a completely different one?

Investment research from Putnam Investments has found that, under the new health care ­system, a married couple, at age 65, should anticipate spending $287,000 on health care during retirement. Since several studies have arrived at or close to that $287,000 as the anticipated lifetime estimate of out-of-pocket expenses for a married couple at age 65, that number has all of the attributes of consistency, if not accuracy.

When does full disclosure in the form of mathematics impinge on the rights of the individual? In the absence of other funding vehicles, one can make a case that the tax-qualified retirement plan is the appropriate one for amassing an “extra” $287,000 to satisfy the health care needs of an aging generation.

The retirement plan structure is the most likely vehicle for accumulating the lump-sum payment for a $143,500 invoice per individual. With tax-deferral for contributions and earnings, and fiduciary review of the investments structures and offerings, it certainly provides more oversight than throwing darts at a dartboard to select investments or than relying on the boisterous uncle who has “never had a loser” in any of his investments. But could the addition of $143,500 to the 401(k) plan of every American have unintended consequences?

There is no simple answer to this debate. In some ways, to include the vagaries of our own fluctuating health care reform seems to reach beyond what should be thought of as a normal retirement savings calculation. In pre-2008 retirement savings calculations, health care received an honorable mention as a footnote, but it was never referenced as the “off the top” consideration it has become today.

Have advisers and investment research firms blurred the lines of retirement savings, or does our new health care reality require that we fully disclose—and help to fund—the inevitable expenses associated with a prolonged hospital stay? This is a question retirement plan advisers need to ask themselves to keep their practices up to speed with today’s economic realities.

Steff C. Chalk is CEO of Fiduciary Consulting and Governance Group Inc., a fee-only fiduciary consulting practice serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement Plan Adviser of the Year award and a faculty member of the PLANSPONSOR Institute, he is also the co-author of “How to Build a Successful 401(k) and Retirement Plan Advisory Business.”