TIAA-CREF, the big retirement firm for educational, health, research, and other organizations, is rolling out a new retirement investment account for healthcare expenses. By setting up what's called a VEBA (voluntary employees beneficiary association), TIAA wants to help people use the same tools employed in tax-advantaged retirement accounts to fund their future medical expenses. Current surveys put lifetime retiree health expenses -- excluding what's covered by Medicare and other programs -- at upwards of $250,000, and climbing.
"We've been hearing over the last 5 and 10 years the increasing importance of continuing coverage of healthcare benefits," says Doug Chittenden, the organization's vice president of institutional product management. "In the markets we serve," he notes, "people often accept a trade-off of salary versus benefits," and the new program provides an efficient way to do that.
TIAA is also making a business decision here, and is responding to the same kinds of financial pressures on employer healthcare expenses that earlier led to the shift from defined benefit pension plans to defined contribution retirement plans. While defined contribution plans have gotten a black eye during the market downturn, Chittenden says "up until 18 months ago, everyone loved the defined contribution approach because of its flexibility."
Many colleges and universities provide some form of guaranteed retirement health benefit today, and their employees would be understandably leery of losing benefits. So TIAA expects to work carefully with employer plans to provide a combination of new and modified benefits. Some employers might, for example, prefer that the new account only be offered to new employees. "There's no magic bullet here," Chittenden says. "The real strategy is to reach out to people who have 10 to 15 years to go to retirement. They need to develop a savings strategy to meet" healthcare needs.
As with retirement investment accounts, employers can choose to match employee contributions. A few early adapters to the plans have opted to make a floor-level contribution for all employees, permitting additional employee contributions. Healthcare needs don't respect pay grades, so the approach to funding these accounts differs from the salary-based contributions to retirement investment accounts. Employers are tending to make contributions in specific dollar amounts and not as percentages of salary, Chittenden explains. TIAA is using its existing life-cycle mutual funds as the underlying investment option for participants.
While helping people throughout retirement, Chittenden says the new program could be particularly attractive to people who retire before age 65, allowing them to tap their healthcare account before Medicare coverage takes effect.