MONEY 401(k)s

Why Millennials Are Flocking to 401(k)s in Record Numbers

hand clicking Apple mouse connected to egg with 401k on it
Jason York—Getty Images

First-time 401(k) plan enrollees are soaring as young workers enter the labor force. This is a positive development. But it won't solve our savings crisis by itself.

Young workers have received the message about long-term financial security—and with increasing assistance from employers they are doing something about it, new research shows.

In the first half of 2014, the number of Millennials enrolling for the first time in a 401(k) plan jumped 55%, according to the Bank of America Merrill Lynch 401(k) Wellness Scorecard. This twice-yearly report examines trends among 2.5 million plan participants with $129 billion of assets under the bank’s care.

The brisk initial enrollment pace is due partly to the sheer number of Millennials entering the workforce. They account for about 25% of workers today, a figure that will shoot to 50% by 2020. But it also reflects a broader trend toward 401(k) enrollment. Across all generations, the number enrolling for the first time jumped 37%, Bank of America found.

One key reason for the surge in 401(k) participation is the use of auto-enrollment by employers, as well as other enhancements. The report found that number of 401(k) plans that both automatically enroll new employees and automatically boost payroll contributions each year grew 19% in the 12 months ended June 30. And nearly all employers (94%) that added automatic enrollment in the first half also added automatic contribution increases, up from 50% the first half of last year.

Enrolling in a 401(k) plan may be the single best financial move a young worker can make. At all age levels, those who participate in a plan have far more savings than those who do not. Another important decision is making the most of the plan—by contributing enough to get the full company match and increasing contributions each year.

Other added plan features include better educational materials and mobile technology. In a sign that workers, especially Millennials, crave easy and relevant information that will help them better manage their money, the bank said participants accessing educational materials via mobile devices soared 41% in the first half of the year.

The number of companies offering advice online, via mobile device or in person rose 6% and participants accessing this advice rose 8%. A third of those are Millennials, which suggests a generation that widely distrusts banks may be coming around to the view that they need guidance—and their parents and peers may not be the best sources of financial advice.

Millennials have largely done well in terms at saving and diversifying. They are counting more on personal saving and less on Social Security than any other generation, the report found. They seem to understand that saving early and letting compound growth do the heavy lifting is a key part of the solution. Despite its flaws, 401(k) plans have become the popular choice for this strategy.

Yet this generation is saddled with debt, mostly from student loans and credit cards, and most likely to tap their 401(k) plan savings early. Millennials are also least likely take advantage of Health Savings Accounts, or HSAs, which allow participants to set aside pre-tax dollars for health care costs. Health savings account usage jumped 33% in the first half, Bank of America found. But just 23% of Millennials have one, versus 39% of Gen X and 38% of Boomers.

Still, the trends are encouraging: employers are making saving easier and workers are signing up. That alone won’t solve the nation’s retirement savings crisis. Individuals need to sock away 10% to 15% of every dime they make. But 401(k)s, which typically offer employer matching contributions, can help. So any movement this direction is welcome news.

Related:

How can I make it easier to save?

How do I make money investing?

Why is a 401(k) such a good deal?

MONEY Ask the Expert

What You Need to Know Before Choosing a Beneficiary for a Health Savings Account

140603_FF_QA_Obamacare_illo_1
Robert A. Di Ieso, Jr.

Q: “What happens to the money in a health savings account when the account owner dies?”–James McKay

A: It’s up to you to decide.

But let’s back up a step: A health savings account offers those in high-deductible health insurance plans the opportunity to save pretax dollars and tap them tax-free to pay for qualified medical expenses, with unused funds rolling over from year to year. Unlike a Flexible Spending Account, you have the opportunity to invest the money. And once you hit age 65, the money can be used for any purpose without penalty—though you will pay income tax, similar to a traditional IRA. So for many people, an HSA also functions as a backup retirement account.

When you open an HSA, you will be asked to designate a beneficiary who will receive the account at the time of your death. You can change the beneficiary or beneficiaries any time during your lifetime, though some states require your to have your spouse’s consent.

Your choice of beneficiary makes a big difference in how the account will be treated after you’re gone.

If you name your spouse, the account remains an HSA, and your partner will become the owner. He or she can use the money tax-free to pay for qualified healthcare expenses, even if not enrolled in a high-deductible health plan, says Todd Berkley, president of HSA Consulting Services. Should your spouse be younger than 65, take a distribution of funds and use them for something other than medical expenses, however, he or she will pay a 20% penalty tax on the amount withdrawn plus income taxes (a rule that also applies to you while you’re alive).

Thus, Berkley warns against a spouse taking a full distribution to close the HSA. He says that it’s better to leave money in the account first for medical expenses, then later for retirement expenses both medical and non—since your partner gets the same perk of penalty-free withdrawals for other expenses after turning 65.

When the beneficiary is not your spouse, the HSA ends on the date of your death. Your heir receives a distribution and the fair-market value becomes taxable income to the beneficiary—though the taxable amount can be reduced by any qualified medical expenses incurred by the decreased that are then paid by the beneficiary within a year of the death.

Failure to name a beneficiary at all means the assets in your account will be distributed to your estate and included on your final income tax return.

MONEY Health Care

The Biggest Healthcare Benefits Decision You’ll Have to Make This Year

Teddy bears with bandages
Zachary Zavislak—Prop Styling by Linda Keil

This year, your company may push you to a high-deductible health plan that looks cheaper, but it may not be.

This benefits open-enrollment period, your employer may ask you—even force you—to enroll in a high-deductible health insurance plan with a health savings account. Nearly three-quarters of companies expect to offer this type of plan as an option for 2015, up from 63% in 2014. And 23% say it will be the only option, Towers Watson found.​

While premiums on high-deductible health plans are typically 10% less than those of more tradi­tional PPO plans, according to data from the Kaiser Family Foundation, co-insurance doesn’t kick in until you’ve paid much more out of pocket.

On average, you’ll foot the first $2,200 in costs as an individual, or $4,500 as a family. (Employers like the plans because they motivate you to be more discerning about your spending.) To pay the bills, you can save pretax dollars—up to $6,650 for a family—in a health savings account (HSA). Most companies throw in cash to sweeten the pot.

According to conventional wisdom, high-deductible plans save money for the young and healthy, who rarely see doctors. But with deductibles and premiums rising across all plans and more companies offering only this coverage, everybody needs to know how to best use high-deductible plans. “Whether we like it or not, higher levels of cost ­sharing is the way of the future,” says University of Michigan Medical School professor Dr. Jeffrey Kullgren. Here’s how to assess your options if you have options—and how to hedge your risk if you don’t:

If you have a choice of plans

Compare costs for a typical year. Your employer, hopefully, will make this easy for you: This fall, 76% of companies plan to offer tools to help employees assess plan options, says Towers Watson. Often these build in your current year’s usage of health services.

No such luck? Estimating your total costs under each plan isn’t easy, but it’s necessary to make the right choice. Start by reviewing your 2014 explanation of benefits statements—probably available on your insurer’s website—to see the insurer-negotiated prices for your usual services, says Paul Fronstin of the Employee Benefit Research Institute. Add the premiums to your expected out-of-pocket costs in each plan—up to and after deductibles—and subtract any employer HSA contribution for the high-deductible option.

Assess a worst-case scenario. In more than 58% of high-deductible plans, families could rack up bills exceeding their yearly HSA contribution limit, according to Kaiser data. In such cases, if you suffer a health crisis, “you’re at risk of using a lot of post-tax dollars,” says Katy Votava, founder of health insurance consulting firm Goodcare. “I like to see an out-of-pocket max that isn’t much more than the HSA limit.”

Gauge your cost tolerance. An American Medical Association study found that 43% of higher-income families in high-deductible plans had delayed or forgone care because of the cost. Almost a third of them reported greater stress, and 15% suffered a disability as a result of putting off care. If you’re likely to skip treatment to save a buck, this plan isn’t your best choice, particularly if you have a chronic condition.

09.15.14 PLA

If you go high-deductible

Budget for your costs. Set aside at least enough in the HSA—­including employer contributions— to cover your expected care, and ideally more, says Kullgren. That way, “when you need care, you’re not faced with the decision to get the service or go without.” Rather than worrying about saving too much, think of this as a backup account for retirement: Leftover funds carry over year to year, growing tax-free, and can be withdrawn penalty-free for any purpose once you’re 65. (You will owe income taxes if the funds are used for anything but health costs.)

Be a savvy consumer. High- deductible plans put the onus on you to be price-conscious. Learn the costs of procedures in advance, and ask questions like “How will this test result affect what you do for me?” says Jacksonville financial planner and MD Carolyn McClanahan. Prices vary wildly, so comparison shop for services like blood tests and MRIs. It’s in your interest to get the best deal you can.

MONEY Taxes

5 Things to Do Now To Cut Your Tax Bill Next April

If you want to owe less for 2014, start your year-end tax planning today.

When everyone else starts loading their backpacks and shopping the back-to-school sales, I know it is time for me to dive back into TurboTax.

That’s because fall is the perfect time to plan my approach to the tax forms I won’t file until next April. By using the next four months strategically, I may be able to reduce the amount I have to pay then.

This is a particularly easy year to do tax planning, because the rules haven’t changed much from 2013. If you do your own taxes on a program like Intuit’s TurboTax or TaxAct, you can use last year’s version to create a new return using this year’s numbers, and play some what-if games to see how different actions will affect your tax bill.

If you use a tax professional, it’s a good time to ask for a fall review and some advice.

Here are some of the actions to take now and through the end of the year to minimize your 2014 taxes.

1. Feed the tax-advantaged plans. Start by making sure you’re putting the maximum amount possible into your own health savings account, if you have one associated with a high-deductible health plan. That conveys maximum tax advantage for the long term. Also boost the amount you are contributing to your 401(k) plan and your own individual retirement account if you’re not already contributing the maximum.

2. Plan your year-end charitable giving. You probably have decent gains in some stocks or mutual funds. If you give your favorite charity shares of an investment, you can save taxes and help the charity. Instead of selling the shares, paying capital gains taxes on your profits and giving the remainder to your charity, you can transfer the shares, get a charitable deduction for their full value and let the charity—which is not required to pay income taxes—sell the shares. Start early in the year to identify the right shares and the right charity.

3. Take losses, and some gains. If you have any investment losses, you can sell the shares now and lock in the losses. They can help you offset any taxable gains as well as some ordinary income. You can re-buy the same security after 31 days, or buy something different immediately. In some cases, you may want to lock in gains, too. You might sell winners now if you want to make changes to your holdings and have the losses to offset them.

4. Be strategic about the alternative minimum tax. Did you pay it last year? Do you have a lot of children, medical expenses and mortgage interest payments? If so, you may end up subject to the alternative minimum tax, which taxes more of your income (by disallowing some deductions) at a lower tax rate. Robert Weiss, global head of J.P. Morgan Private Bank’s Advice Lab—a personal finance strategy group—says there are planning opportunities here. If you expect to be in the alternative minimum tax group, you can pull some income into this year—by exercising stock options or taking a bonus before the year ends—and have it taxed at the lower AMT rate. It’s good to get professional advice on this tactic, though. If you pull in too much money you could get kicked out of the AMT and the strategy would backfire.

5. Look at the list of deductible items and plan your approach. Many items, such as union dues, work uniforms, investment management fees and more are deductible once they surpass 2% of your adjusted gross income. Tax advisers often suggest taxpayers “bunch” those deductions into every other year to capture more of them. Check out the Internal Revenue Service’s Publication 529 to view the list, and try to determine if you want to amass your deductions this year or next. Then shop accordingly.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

MONEY Health Care

Health Savings Accounts: A Rx for Retirement

A health savings account can do double duty and help you build your retirement nest egg. Photo: Joshua Scott

A health savings account helps you stash cash for today's medical costs, but it can also help you build a bigger nest egg.

How would you like a triple-tax-free way to save for certain retirement expenses?

No, this isn’t the latest Nigerian email scam. Rather, it’s the very real advantage of a Health Savings Account (HSA), an investment vehicle available to those with qualifying high-deductible health insurance plans.

The pretax money you put in is meant to be used for that year’s unreimbursed health costs, but unspent funds can be rolled forward to grow tax-deferred and withdrawn tax-free at any later date to pay for health care.

After 65, you can also tap the account for nonmedical expenses without penalty; those withdrawals will be taxed as income just like a traditional IRA.

Considering that a 65-year-old couple leaving the workforce today can expect to spend $220,000 on health care, as Fidelity reports, it’s no wonder HSAs are gaining traction as a retirement savings tool. “They’re the best deal in town,” says Scottsdale, Ariz., financial planner Dana Anspach, author of Control Your Retirement Destiny.

Of course, the HSA works as a retirement account only if you can sock away more than you need for this year’s medical costs. Therein lies the challenge. Here’s how to ensure an HSA will offer you a healthier retirement.

Make sure you’ll benefit

Premiums on HSA-eligible health plans are less expensive than those of lower-deductible plans, but you could spend more overall depending on your health. That’s because of the deductible. In 2013, this must be at least $1,250 for individuals and $2,500 for families.

The HSA is meant to help you save for this and other out-of-pocket costs; in 2013, individuals can stash $3,250, families, $6,450. Those 55-plus can add another $1,000. Also, 72% of employers contribute—an average $920 for singles, $1,600 for families, Kaiser Family Foundation reports. Assuming you’re covered through work, your employer will pick a default custodian for the account.

To end up with a balance at retirement, you’d need to let some of the money in the HSA ride each year. The more you pay in, the better your odds of having leftover funds. Being healthy helps too. (Use the tool at WageWorks to compare an HDHP/HSA with other insurance plans, based on last year’s usage.) Medical needs are unpredictable, though, so also consider how you handle costs when they come up.

Jacksonville financial planner and MD Carolyn McClanahan says you’re more likely to have money to spare if you know how to work the health care system—e.g., comparing prices and asking for generic meds.

Fill the right buckets

Most HSA users tap their accounts for immediate health care costs, allowing what’s left to roll forward. To really grow the HSA, however, you could dedicate it to retirement by paying health costs with other savings. “This makes sense for those who have spare cash flow,” says Coral Gables, Fla., financial planner Joshua Mungavin.

Wherever you store the money, aim to set aside at least two times the deductible for current bills, says Anspach. Beyond that, how does an HSA fit into the hierarchy of retirement accounts? Though it has the best tax benefits, it isn’t as flexible as a 401(k) or IRA. Prior to 65, you pay a 20% penalty on nonqualified withdrawals, for example. So fund your 401(k) up to any match, then split your remaining money among a Roth IRA, 401(k), and HSA.

Invest for now and later

Keep money earmarked for today’s health care in cash. (Some custodians require you to maintain a cash balance anyway—typically $1,000 to $2,500—before you can invest.) The rest of the HSA can be allocated as you would your other retirement dollars, says Mungavin.

Mutual fund choices tend to be limited though, notes Roy Ramthun, president of HSA Consulting Services. Some custodians offer less than 20.

No good ones in your employer’s offering? Roll it over to another custodian; compare options at HSASearch.com. You should be able to find investments you like.

HSA Bank, for example, offers a full brokerage via TD Ameritrade, while Health Savings Administrators lets you pick from 22 low-cost Vanguard funds. Examine account fees, too, as charges for banking services and account maintenance are common. You don’t want to avoid the drag of taxes only to have your balance pulled down by fees.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser