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Make Workplace Benefits Work for You

Employees can maximize their benefits by investigating HSAs, free or cheap 401(k) advice, insurance, and other perks.

Make Workplace Benefits Work for You

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Most of us see Labor Day as just the end of the summer, but Christine Benz, our director of personal finance, thinks it's also a good time for employees to really think about how to maximize their workplace benefits.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here. And by the way, investors don't have to do this stuff today, but they should think about it, especially as we're entering open enrollment season for employee benefits.

Glaser: Well, you do have five areas you think employees should really investigate further. The first is health savings account, HSAs. Why do you think this is an important one?

Benz: I love HSAs, and the key reason is that it is the only triple tax-advantaged vehicle within the whole tax code. So what that means is that you steer pretax contributions into the HSA. The money compounds and grows on a tax-free basis, and then you pull out that money for healthcare expenses and that money, too, is totally tax-free as long as these are qualified healthcare expenditures. So it's really advantageous from a tax standpoint. You have to be participating in a high-deductible healthcare plan in order to be eligible for an HSA. So, for 2016 the HDHP minimum out-of-pocket deductible is $1,300 a year for individuals and $2,600 for families. So you have to be in that HDHP. A lot of employees today are getting shoved into the HDHP. They don't have a choice. Some employees might still have an opportunity to participate in the traditional healthcare plan or the HDHP-HSA combination.

You can use your HSA in one of two ways. The first way is simply to use it as a place where you stash cash that you plan to need for healthcare expenditures, say, in the current year. So to kind of right-size your HSA if you plan to use it this way, look back on last year's out-of-pocket healthcare expenses, see roughly what they are, what they were, try to forecast what you think your healthcare expenditures might look like for the following year. And of course, this is a very tricky thing to do, but at least contribute something to the HSA because chances are you will have some out-of-pocket healthcare expenditures, and so it only makes sense to take advantage of the tax breaks that come along with the HSA even if you intend to spend it pretty quickly.

The second key way to use an HSA--and this is one that is often touted as advantageous for the healthy and wealthy--so the basic idea is that you're using the HSA as an auxiliary investment vehicle. So the basic idea is that you are steering money into the HSA. You're not touching it actually for healthcare expenditures; rather, you're investing it. You're letting it grow, and the money can roll over from year to year. So it's not like a flexible spending account where that money has to come out in a given calendar year. Within HSA the money can go over from one year to the next. So this can be a really attractive strategy in part because the tax benefits can be so great.

Say, in a worst-case scenario or maybe kind of a best-case scenario where you end up not needing all that money for healthcare expenditures and retirement, that money is treated essentially like a traditional IRA. So the withdrawals, assuming that they're not coming out for qualified healthcare expenditures, would be treated as ordinary income.

Glaser: So that could be one way to save for retirement. But for most people the primary vehicle will be a 401(k) or something similar. And you say that you should check out any free or maybe cheap advice that's embedded in 401(k) plans.

Benz: That's right. So 401(k) participants or 403(b), 457 participants, will tend to be able to obtain free advice in a couple of ways. The first avenue, and this is one that is open to almost all company retirement plan participants at this point, is simply to look at whether there are target-date investment products available to you. Target-date funds have gotten a lot better. They're not universally good, but the target-date lineups that have enjoyed the most uptake in 401(k) plans are the better ones. So we see the dollars flowing to Vanguard; we see the dollars flowing to T. Rowe's very good target-date series. So, kind of, use that as a benchmark for your own results.

One thing that your investment provider, your 401(k) investment provider will typically give you is a customized look at what your annualized return has been. So, say, you're someone who's been making your own selections, use the target-date fund as kind of a benchmark for how you've been able to do on your own, and be honest about your own performance. If you find that over a period of years you've lagged what a target-date fund geared toward someone in your age band has done, you may be better off in the target-date vehicle. And incidentally, we see when we look at investor returns or dollar-weighted returns within target-date funds, we tend to see investors on their best behavior. So they plow the money into the target-date funds at regular intervals throughout the year, which tends to be a good way to invest. And once they get that program started, they tend to stay put. And so, what we tend to see is that the investor returns in target-date vehicles tend to outdo investor returns in other fund categories, which I think is encouraging.

Another way to think about getting advice--and this is not quite as widespread as target-date series and 401(k) plans--but is to look at some type of managed account. And that will tend to give you a customized asset allocation program based on your own human capital. So, you give your provider a little bit of information about yourself, maybe about your spouse, your spouse's career path, your own career path, the field in which you work, and you get customized guidance that suits your own particular situation. There may be a little bit of a fee associated with such a managed account, so do read the fine print, because that could sort of put downward pressure on your returns. But it's something to look into because some of these solutions are pretty neat. So, for example, if you work in the financial services industry, the customized investment program for you might downplay the financial services sector as part of your investment portfolio because so much of your financial wherewithal is riding on the sector already.

Glaser: The third benefit you think employees should think about is a disability insurance. Why is that something you'd want to get from your employer?

Benz: Well, the key reason you want to purchase it through your employer is that it will tend to be much more affordable than purchasing it on your own in the open market. And the key reason to look at disability coverage in general is that it's a type of insurance that you're very likely to need during your lifetime. So one in four workers will encounter some sort of disability prior to age 65, and so it's the type of coverage that you obviously want to obtain before you need it. It's also important to note that if people are signing up for a disability insurance, you're typically given the option if you're doing it through your workplace to buy it with pretax dollars or aftertax dollars. My guidance is to choose aftertax dollars. It won't be right in each and every situation, but the key advantage of doing that is that when you do begin taking disability benefits that those benefits will have already been taxed, so you won't owe taxes on them when you receive them.

Glaser: And there's other potential perks that could help you bring your tax bill down.

Benz: Right. And these really depend on your employer and the type of fringe benefits that it's offering, but there may be commuter benefits. So, for example, if you are prepaying for some sort of public transportation passes, that can give you a tax break as well. Also investigate whether there are any sort of dependent care programs where you can obtain some tax breaks. Some employers are really good about providing them to their employees. It's also important to kind of check in on these benefits as your life situation changes. So maybe you're suddenly someone who is partially responsible for caring for an adult parent or you're paying caregivers to help care for an adult parent. You may be able to obtain a tax benefit as well.

Glaser: And finally, you think that it's worth looking out for programs to help with student loan repayment.

Benz: Absolutely. This is not a widespread benefit at this point in time. Just 3% of employers currently offer some sort of student loan repayment program, but it is something to keep an eye on because we are seeing these enjoy increased uptake. And also, this issue with student loan debt is not going away. So there is more than $1 trillion in student loan debt outstanding currently. More and more young workers are coming into the workplace with this as a key financial headwind, and getting rid of this debt is a key financial goal. So to-date it tends to be offered mainly by kind of high-end workplaces to highly skilled workers, but I would keep an eye on this space because I expect to see this benefit become more widespread.

Glaser: Christine, thanks for these tips today.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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