PLANSPONSOR - December/January 2020 - 16

COVER STORY | THE SAVINGS HIERARCHY
That framing influences his sense of how to approach these
programs, starting with whether people are prepared for even
small emergency expenses. " The first question I have is, 'Can you
pay to replace [a flat] tire?' " Kading says. " If the answer is no, then
we have to start with prioritizing the fundamental basics. There's
no way to tell somebody who is barely making it financially that
they need to save 10% of their income for retirement. "
For some people, utilizing their extra income first to pay off
certain types of debt can make sense, Hanna says. " I do think it
is generally accepted that the removal of consumer debt
and unsecured debt should be prioritized, " he says.
" That debt is not leveraged on an appreciating
asset, and often it carries a high interest rate.
When people are looking at paying down
high-interest-rate debt, we tell them, 'You
are basically earning a guaranteed return
of X% when you pay down your debt with
an interest rate of X%.' "
It makes sense for many people
to prioritize building their rainy-day
savings as a first-tier goal. " In the retirement
industry, our focus is on helping
people prepare for retirement. But I think we
their employer offers a 401(k) match, it's important to take advantage
of that, " he says, " even if it's not their top priority. "
An HSA is
less well-known
as a good longterm
savings
vehicle than is
a 401(k).
do have to also take a humanistic focus and say,
'We have to help people lead better lives day to day,' "
Hanna says. " That's where the conversations come in about
budgeting and emergency savings. "
People can take the first step by saving $1,000 in an emergency
account, Hanna suggests. " It's important to have some
emergency savings, so people don't have to go into consumer
debt to pay their bills for emergencies, " he says.
Kading recommends aiming for three to six months of
expenses saved, and where someone falls in that range depends
on the person's income level, personal circumstances and lifestyle.
Some people need to save toward the higher end of that
range such as a homeowner, someone with health issues or
someone who owns an older car, he says. A good place to start
is saving enough to cover one month. " If you tell people they
need to save three to six months of expenses right away, it's overwhelming, "
he says.
While debt repayment and emergency savings may be the
first-tier priorities for many people, they should not be the only
priorities, sources say. Even if the person can contribute only
a modest amount in the beginning, it is worthwhile to also
start making a 401(k) contribution, Adams says. " If they can,
we encourage people to do some split toward the two targets.
Splitting their dollars to accomplish more goals can be the most
efficient way to do it. "
Realistically, people think about more than one financial goal
at a time, says adviser Joe Connell, a partner in the retirement
plan services practice at Sikich LLP in Naperville, Illinois. " Even if
they're paying off consumer debt that's got an 18% interest rate, if
16 PLANSPONSOR.COM December 2019 - January 2020
Retirement-Saving Priorities
There is growing consensus on the priorities when people save
for retirement, Hanna says. " What's becoming more accepted as a
best practice is that you should save into your qualified employer
plan up to the match level first, " he says. " Then you should save
into your HSA [health savings account] up to the maximum
annual contribution-and not spend your HSA on an
annualized basis but use it as a retirement-savings
vehicle. Then, if you have any money available
for savings, you can go back to the 401(k) and
make a higher contribution. "
Plan goal No. 1 for Sikich is getting
participants to save to the full employer
match level, Connell says. " A simple way
to show participants the value of the
match is to use a calculator tool to model
the impact of getting no match and of
getting the match, and what they might
be missing in the long term if they're not
getting the full match, " he says. " Seeing the
impact over the course of their career opens
their minds to how important it is to their outcome
to get the match. "
An HSA is less well-known as a good long-term savings
vehicle than is a 401(k)-to both employees and many employers,
says Daniel Bryant, president of national sales, retirement and
private wealth at Sheridan Road Financial in Northbrook, Illinois.
When insurance salespeople meet with employers to talk about
their health benefit decisions, " health-insurance benefits take up
99% of the oxygen in the room, because it is so complicated, " he
says. " The HSA often just gets added into the health-care discussion.
That's the conundrum: HSAs have been given a bad slot in
life, and people don't understand them. "
Employees may get little or no education about HSAs or
the realities of retirement-phase medical expenses. " An HSA is
the most misunderstood benefit when it comes to saving, " says
Nick Madl, a partner at advisory firm intellicents inc. in Kansas
City, Kansas. " People don't understand how much their medical
expenses are going to be in retirement. And we see people mix up
HSAs with FSAs [flexible spending accounts] all the time. Most of
the workforce believes that if they don't spend their HSA balance
in that year, they're going to lose it. " In reality, he says, an HSA
balance can accumulate from year to year and be invested similarly
to a 401(k) (see " Steady as It Goes, " page 40).
The benefits of saving for retirement health care expenses in
an HSA are " horribly unknown, " Adams says. He cites industry
research finding that less than 4% of HSA assets are invested-an
indicator of how few account holders think of their HSA as a longterm
savings vehicle. " But, for many people, once they maximize
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