A New York company, through an alliance with Fidelity Investments and Aetna Inc., introduced the first health benefit program Tuesday tailored to help people save money for retirement health expenses.
Emeriti Retirement Health Solutions said it created the program for people who work in U.S. colleges and universities. The Emeriti Program, which is to begin opening accounts at 29 participating schools beginning July 1, lets the institution place funds in a pretax account for faculty and staff.
Before retirement, the assets are to be invested in Fidelity's 'life cycle' Freedom Funds or Fidelity money market funds. After retirement, account balances can be integrated into Medicare to offset supplemental insurance costs and pay for prescriptions.
Kenneth Cool, the co-founder and president of Emeriti, said that the program initially will be offered to faculty and staff at colleges nationwide but that he hopes it can be expanded from there.
'Obviously, we started with the higher education community because that is the community we' were founded to serve, Mr. Cool said. 'We have asked the SEC to sanction us for the higher ed. community, and from here it will be interesting to see how it evolves. We hope it will become an expandable paradigm for both the profit and nonprofit communities.' (The program has received Securities and Exchange Commission approval, he said.)
The Emeriti Program takes a defined contribution approach to prefunding retirement health-care costs. It uses employer- and employee-funded trusts called Voluntary Employees' Beneficiary Associations as the investment vehicles; they are funded during the course of employment. Contributions made by higher education institutions are not taxable to employees, but contributions made by employees are after-tax. Program assets grow tax-free until retirement, when they can be used tax-free to pay for qualified medical expenses, including Medicare supplemental insurance premiums after age 65.
Mr. Cool said his health benefit program is different from the health savings accounts that have gained popularity in the past two years.
Health savings accounts, authorized by the Medicare Prescription Drug Improvement and Modernization Act of 2003, let employers and employees contribute pretax funds (up to $2,600 for an individual and $5,150 for a family this year) to cover qualified medical expenses not paid for under high-deductible health-care plans.
Health savings accounts help people pay for medical expenses while they are employed, Mr. Cool said, but because of the low maximum contribution limits, it is difficult to use HSAs to save for retirement medical costs. 'The health savings accounts may help individuals save a few dollars for retirement,' he said, 'but they can not help establish a substantial nest egg.'
HSAs have some momentum behind them, however. A survey by Mellon Financial Corp.'s human resources and investor solutions unit that was released Thursday said the number of employers offering health savings accounts could more than quadruple next year. About 7% of the 360 U.S. employers surveyed offer the product, Mellon said, but 32% said they planned to do so by next year.
Most companies planning to initiate health savings accounts would do so as an optional employee benefit, Mellon's survey said; only 2% planned to fully replace their current health insurance offering with HSAs.
James Foreman, a senior vice president in Aetna's national accounts business, said its research indicates that health savings accountholders intend to save for retirement health costs but that 'the amount ultimately saved is minuscule.'
The health benefit program 'is a targeted offering for retirees,' he said. 'It is a dedicated savings vehicle that accomplishes what health savings accounts can't accomplish because it is a new product for retirees.'
Mr. Cool said that, unlike HSAs, his health benefit program has no annual contribution limit.
Linda Evers Cool, the founding director of Emeriti, which was started this year, said the program was created after a three-year study by the Andrew W. Mellon Foundation found that many college faculty members were delaying retirement because of concern about rising medical costs.
'Our research showed that individuals at institutions with substantial commitments to post-retirement health insurance retired on average 18 to 36 months earlier than peers at institutions with no such health benefit,' she said.
Cynthia Egan, an executive vice president at Fidelity, said her company's research indicates that the average 65-year-old couple will need $190,000 to cover health expenses in the succeeding 15 to 20 years. This estimate was up 8.6% from last year, Fidelity said.
Mr. Cool said in addition to the 29 institutions -- including Pepperdine University in California and Smith College in Massachusetts -- that have signed up, 200 are considering the program. 'The plan is national, the plan is comprehensive, and the plan is a turnkey solution for schools nationally,' he said.
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