The CDHP-401(k) Comparison

In the first six years that 401(k)s were available, 7.5 million employees enrolled and total plan assets reached $92 billion, according to the Employee Benefit Research Institute. After six years of consumer-driven health plans, only 3.8 million employees are enrolled, and health savings accounts hold only $4 billion. It should be noted, however, that it took 401(k)s 10 years to surpass defined-benefit plans in number of participants, and 20 years to enroll a majority of workers.

    Even now, with 401(k)s hitting the 30-year mark, participation and savings remain woefully inadequate. Only 77 percent of employees with access to a 401(k) participate, the median account balance is only $66,650, and asset allocation is often bizarre. There’s little reason to think that the same employees who can’t manage 401(k)s are prepared to run a cost-benefit analysis for their health care spending.

    “Transformation takes time,” says Jay Savan, principal at Towers Perrin. “For 30 years, we engrained people in managed care. The consumer-driven arena has existed for only six or seven years, but people are aggravated because they don’t see results. Given the newness of the plans, the indicators are actually pretty good.”

    Savan notes that HSAs are really savings vehicles that are even more tax-advantaged than 401(k)s. “Account-based health plans have value to employees because they enable retirement,” he says.

    The savings are slim, however. According to America’s Health Insurance Plans, 88 percent of the HSA accounts in 2006 had average annual balances of less than $2,500; only 4 percent had balances of more than $5,000.

    Empirical research demonstrates that a company match is necessary to drive 401(k) participation; early evidence from consumer-driven health plans also points to a need for employer seeding. But more than a third of the large employers offering HSAs do not contribute to the accounts, and among those who do, the average contribution is only $626, according to Mercer.

    The tax savings from health savings accounts are not likely to cover the average deductible. For a single taxpayer earning $40,000 a year in 2007 and using the standard deduction or itemized deductions of 18 percent before HSA contributions, the tax savings from a maximum account contribution of $2,850 would be $428, according to the Treasury Department.

    Despite these limitations, the consumer-driven health plan industry, including many financial institutions, continues to push the plans. Two-thirds of the financial institutions responding to a January 2008 Wolters Kluwer Financial Services survey already offer HSAs, and one-third of those that don’t are planning to offer them in the next quarter. The Financial Research Corp. forecasts that health savings account assets will reach $15 billion by 2010, a pittance compared with the more than $2 trillion in 401(k) accounts, but a potential new market for the banking sector.

    Despite the comparisons to 401(k)s, employers are unlikely to shift all health costs to employees or to cut coverage to catastrophic care only, according to Blaine Bos, a partner at Mercer.

    “To move costs totally onto employees, you would have to reform the entire health insurance industry,” he says. “We could go to a place where employers offer catastrophic coverage only, but there’s not a lot of appetite for that when benefits are an important part of the compensation package and most employers are concerned about recruitment and retention.”

Workforce Management, April 7, 2008, p. 26 — Subscribe Now!