73% of human resources professionals

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1 RETIREMENT & BENEFIT PLAN SERVICES Workplace Insights Stretching your benefits dollar May 2014 Taming expenses while maintaining program quality Faced with escalating health care costs, the increasing complexity of the health care system, and the implementation of the Affordable Care Act, it is no secret that employee benefits and human resources professionals are under pressure. They must try to stretch their benefits dollar without making cuts to key programs, including retirement programs, and negatively affecting employee satisfaction. Health care is causing pain for employers The pool of budget dollars to support a competitive benefits program is shrinking, absorbed by higher health care costs that have taken over a disproportionate share of total benefits spend. And employers are worried, with 62% of surveyed CFOs reporting that rising health care costs are a significant concern. 1 Adding to their unease, health care comes wrapped in ever-increasing complexity. While health care cost increases have subsided somewhat 2 in recent years due to the slowing economy and plan design changes adopted by employers, the overall cost of health care continues to bedevil employers who are trying to provide a competitive benefits offering to attract and retain quality talent. As shown in the chart below, health care costs represent a substantial and growing portion of the total employer spend on employee benefits. Health care costs as a percentage of total employer spend on benefits 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Health benefits Retirement benefits Other 73% of human resources professionals said they have needed to become experts on health care and retirement to do their job effectively a significant change in their role, and one they may not be prepared to contend with, given everything else on their plates. 3 Source: EBRI, Employer Costs per Hour Worked for Employee Compensation, Private Industry Employees, Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation ( BofA Corp. ). Banking activities may be performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., Member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and Member SIPC. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value

2 STRETCHING YOUR BENEFITS DOLLAR 2 To help employers cope with this issue, we present some key considerations as they grapple with the challenge of cutting expenses without sacrificing the quality of their benefits offering. Strategy considerations for employers To address both near- and long-term concerns, you may want to consider taking a fresh look at three areas critical to the overall success of your benefits program: Optimization, Education and Integration. Reviewing efforts in these areas may help you obtain greater value for your benefits spend. 1 Optimization Look at all of your benefits and make the most of every opportunity for cost savings and efficiencies. Begin with the basics a holistic review of your plan design How does your health care strategy fit into your complete benefits offering? Does it still meet the overall needs of your workforce, or has your workforce changed? For example, you may want to examine your employees age segments to determine their benefits priorities. It s possible that your workforce has evolved beyond your original benefits design. Is your offering one size fits all? It may be a good time to take a closer look under the hood and think more creatively about your program. Allocating your benefits dollars in different ways may free up some savings. For example, some participants could opt to take less life insurance and allocate more toward health care or retirement savings. Are you getting the most for your fees? Talk to your insurance providers about their offerings to ensure your organization is taking advantage of all programs in return for your investment. There may be services or programs included in your package that your organization is not using or fully optimizing, such as wellness support or other services included or available at low cost. Industry studies show that emphasizing preventive health care can minimize the odds of chronic disease in the long run, contributing to a reduction in your overall health care costs. 4 Employ one of the most effective cost management tools the combination of High-Deductible Health Plans and Health Savings Accounts The adoption of High-Deductible Health Plans (HDHPs) paired with Health Savings Accounts (HSAs) has helped to slow the rate of cost increases, 2 offering a rare financial bright spot. High-Deductible Health Plans continue to show promise as a means to help ease the employer s cost burden. Because they are generally easy to implement, employers should consider adding HDHPs to their plan design in the near term. Consider the High-Deductible Health Plan (HDHP) to manage your costs offering an HDHP with a Health Savings Account can be an effective cost management tool and optimization strategy.

3 STRETCHING YOUR BENEFITS DOLLAR 3 HDHPs and HSAs are growing in popularity. According to Devenir, HSAs grew to an estimated $19.3 billion in assets in 2013 and 10.7 million accounts, or about 8% of Americans. 5 The number of employers contributing to workers health accounts has also increased. EBRI reports that nearly three-quarters (71%) of workers with an HSA or an HRA reported that their employers contributed to the account in An HSA is portable employees can take it with them when they change employers and can save toward health costs in retirement, with no minimum required distribution (MRD) starting at age 70½. This benefit alone makes it worthwhile for employers to promote HSAs as useful saving vehicles, especially within a broader financial wellness plan. Health Savings Accounts have grown to $19.4 billion in assets National HSA assets (in billions) $20 $15 $10 $5 $0 $17.1 Deposits $13.7 Investments $11.1 $9.0 $6.8 $5.3 $3.2 $2.3 $1.6 $1.7 $0.1 $0.2 $0.2 $0.4 $0.9 $ $1.7 $3.4 $5.5 $7.2 $9.9 $12.2 $15.4 $19.4 Total HSA assets (in billions) Source: Year-End 2013 Devenir HSA Research Report. Be ready for the Cadillac Tax 56% of employees report saving less for retirement due to feeling the pinch of health care costs. 7 According to Employee Benefits Research Institute (EBRI), the current health care estimate for a couple who retire at age 65 is $283, Employers are feeling anxious about the Affordable Care Act s excise tax on high-cost plans. Commonly called the Cadillac Tax, the excise is scheduled to roll out in 2018 and tax employers 40% for coverage values exceeding $10,200 for individuals and $27,500 for families. Since health care costs continue to rise faster than the rate of inflation, the Cadillac Tax may eventually affect many plans. Employers are considering alternatives to incurring the tax, such as raising deductibles to simply dropping high-cost plans. Adding or making improvements to wellness programs is also being looked at as another means of protection. A simple way to stay under the threshold is to offer plans that cost less, such as an HDHP with an HSA. Typically, HDHPs have lower premiums compared to a more traditional medical plans.

4 STRETCHING YOUR BENEFITS DOLLAR 4 2 Education Employees can t appreciate what they don t understand A targeted education and communication program helps ensure that employees fully understand their benefits and use them effectively and can see both a short- and long-term value. Education around HDHPs and HSAs is especially important given their effectiveness as a cost management tool. Keep the following education points in mind when planning: Promote both physical and financial wellness Emphasize to your employees that staying healthy helps to keep their costs down and frees up more of their funds to save for their future. Help them better understand costs through greater transparency. Employees may only consider what they pay and don t have a full appreciation for how much of the total cost the company pays. Promote health improvement year-round, not just at annual enrollment. Make your annual enrollment work harder by encouraging enrollment in your retirement savings plan at the same time, while employees are already in an enrollment mindset. Beyond synchronizing health care and retirement enrollment, help employees think about the long-term consequences of the benefits elections and decisions they make today, especially in terms of their financial wellness. Leaving benefits on the table? Education is a genuine opportunity to encourage financial wellness. Employees are simply not taking full advantage of their available benefits. Focus on clarity for HDHPs and HSAs HDHPs with HSAs offer value and flexibility, but employees may not be clear on the advantages. Employers should address the lack of awareness and inertia that can present formidable barriers to engagement. Demystify the HDHP. A high-deductible health plan (the name itself can be off-putting) does not mean HDHPs are just for the healthy and wealthy. Stress that higher deductibles are just one piece of the puzzle, coming into play when employees get sick, versus higher monthly premiums for alternative plans when they may be generally healthy otherwise. Employer support. Educate employees on how they can take advantage of any available employer contributions to their HSAs. Encourage them to contribute enough into their HSA for cash on hand to cover both planned and unexpected out-of-pocket qualified medical expenses for the year. Tax breaks. HSAs offer triple tax benefits: Money goes in tax-free and has the potential to accumulate tax-free, and withdrawals for qualified health expenses are not taxable. Employees can build equity in their account that earns interest year over year and help pay out-of-pocket expenses. 9 Lower cost. HDHPs typically have lower premiums compared to traditional health plans; employees can contribute the difference in an HSA, creating savings for retirement expenses. Not every employee has large health care expenditures every year; any amount not used will automatically roll over and can be invested for health needs in the future, including retirement. Manage change. Allow time to manage expectations start phasing in more affordable options now, so that change is gradual for employees.

5 STRETCHING YOUR BENEFITS DOLLAR 5 Harness the power of incentives Employers are spending more per employee on wellness incentives, 8 with the majority of incentives tied to progress toward a health goal. Programs are expanding to include spouses and domestic partners. 8 According to the National Business Group on Health, 74% of employers are expected to offer incentives for participation in health improvement programs in Are you leveraging the power of employee health incentives? Are your incentives tied to healthy activities? Incentives can create employee engagement, particularly when linked with activities such as biometric screenings and/or lifestyle coaching. For example, many employers tie completion of a Health Risk Assessment (HRA) or completion of a biometric screening to a reduction in premium. For example, consider a message to employees of how they can complete a key health care step tied to a reward such as a lower premium or a contribution to their HSA. 3 Integration For greater efficiencies and value, take a holistic, integrated view Workplace benefits do not exist in a vacuum. Employers can no longer afford to view each aspect of savings and benefit plans in isolation they are part and parcel of an overall picture of financial wellness. For employees, a total benefits solution should take advantage of the full range of wealth accumulation and planning options available. As a plan steward, design your program with the end in mind. Your focus should be on helping employees pursue good benefit outcomes and increasing their understanding with an integrated approach to their personal and workplace savings and investments. Explore the advantages of integrating benefits with one provider versus multiple providers. A one-click integrated view can help employees visualize their benefits in their entirety and better understand how their benefits work together. How it all comes together Remind employees of how their benefits work together. Two in particular the 401(k) and HSA are among the two most tax-efficient opportunities available to help them save for their retirement and health care expenses. Encourage your employees to consider maximizing their contributions if possible, as follows, to fully realize the tax-efficiency: First, they should contribute enough to the 401(k) plan so as to fully maximize any employer contribution you provide. Next, they should maximize a contribution to their HSA. Finally, if possible, they should maximize their 401(k) plan contribution beyond the match, up to the IRS or plan limit. The power of two HSA 401(k) Although your employees may be juggling many financial priorities, remind them of the power of two the HSA and 401(k) plan. These are two of the greatest tax-advantaged savings vehicles currently available today to help them save for retirement and medical expenses.

6 STRETCHING YOUR BENEFITS DOLLAR 6 The benefits of a single view When looking at benefits from an employee perspective, it can be difficult for them to manage retirement, health care, equity and other wealth accumulation plans, yet stay focused on career and life goals. Taking a unified approach to administering and communicating benefits can better support your employees financial wellness goals. An integrated approach, whether it s consolidating benefits with fewer providers or using holistic messaging, helps employees better appreciate the full value of their benefits and how to maximize their effectiveness. Learn more Employers can get greater value for their benefits spend without sacrificing quality. It takes determination and creativity, insights and flexibility, and a commitment to ensuring that every dollar spent on benefits and rewards programs is optimized. In that way, employers can manage total benefits spending while continuing to attract and retain the best and brightest talent for their business. Our representatives can help you examine your benefits offering and talk with you about strategies that may make it more effective. For more information, contact your Bank of America Merrill Lynch representative. You also can call us at , visit us online at benefitplans.baml.com or us at benefitplans@baml.com.

7 STRETCHING YOUR BENEFITS DOLLAR 7 1 Bank of America Merrill Lynch 2013 CFO Outlook. The 2013 Mid-Year CFO Outlook was conducted by Granite Research Consulting which interviewed 250 CFOs, finance directors and other executives selected randomly from U.S. companies with annual revenues between $25 million and $2 billion. The survey period began on April 29 through May 30, The statistical range of error for this sample is plus or minus 4%. 2 Performance in an Era of Uncertainty, 17th Annual Towers Watson /National Business Group on Health Employer Survey on Purchasing Value in Health Care, Bank of America Merrill Lynch Employer Workplace Benefits Report, August 2013: Boston Research Group interviewed and completed a national sample of 1,000 employers of all sizes from July 2013 through August 2013 on behalf of Bank of America Merrill Lynch. To have qualified for the survey, employers must have offered their employees a 401(k) plan. 4 Farshad Fani Marvasti, M.D., M.P.H., and Randall S. Stafford, M.D., Ph.D., From Sick Care to Health Care Reengineering Prevention into the U.S. System, New England Journal of Medicine, September 6, Devenir HSA Research Report, Year-End HSA Market Statistics & Trends, February 12, Mayer, Kathryn, More employers contributing to HSAs, HRAs, benefitspro, February 18, Bank of America Merrill Lynch Employee Workplace Benefits Report, March 2013: Boston Research Group interviewed and completed a national sample of 1,014 interviews for Bank of America Merrill Lynch. An internet methodology was used to reach 401(k) plan participants. Interviews were collected from March 6 through March 17, Respondents were screened to ensure current participation in a 401(k) plan. Bank of America Merrill Lynch was not identified as the sponsor of the study. No quotas were set and no weighting was necessary. 8 Employee Benefits Research Institute, October Savings Needed for Health Expenses for People Eligible for Medicare. Estimate is for Medicare Part B and Part D Premiums, Medigap Premiums, and Out-of-Pocket Drug Expenses (median prescription expenses) for those who reach age 65 in Individual expenses will vary based on health needs. 9 About Triple Tax Advantages: Any interest or earnings on the assets in the account are tax-free. Participants can receive taxfree distributions from their HSA to pay or be reimbursed for qualified medical expenses they incur after they establish the HSA. If they receive distributions for other reasons, the amount withdrawn will be subject to income tax and may be subject to an additional 20% tax. Participants may be able to claim a tax deduction for contributions made to the HSA. We recommend that applicants and employers contact qualified tax or legal counsel before establishing an HSA. 10 National Business Group on Health, Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation ( BofA Corp. ). Banking activities may be performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., Member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and Member SIPC. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value The strategies presented are intended to illustrate the products and services available through Bank of America Merrill Lynch; it should not be considered an offer, solicitation or endorsement. These illustrations may not be used with the general public under any circumstances. This material does not take into account your plan s objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable, if necessary, seek professional advice Bank of America Corporation. All rights reserved. ARBNC5HH WP /2015