TIAA Institute study finds many employees overpay for health insurance, limiting their ability to save for retirement

Amid continued uncertainty caused by the COVID-19 pandemic, study underscores importance of employees maximizing their salary and benefits

NEW YORK (September 15, 2020) –Today, the TIAA Institute released new research that reveals a large majority of employees spend too much on their health insurance plans. On average, employees who do not choose the low-coverage plan overpay by nearly $1,700 per year. This impacts employees’ ability to save for retirement, with 23 percent who overpay for health insurance being more likely to forgo matching retirement contributions.

The study “Overpaying and Undersaving: Correlated Mistakes in Retirement Saving and Health Insurance Choices” was conducted by Leora Friedberg and Adam Leive of the University of Virginia. The study used four years of administrative data from a large higher education employer to examine the health insurance and retirement savings decisions of employees, and the relationship between these decisions.

“Choosing health insurance plans and retirement savings options are two of the most important and complex financial decisions that any American will make,” said Stephanie Bell-Rose, Head of the TIAA Institute. “The strong correlation between these decisions indicates that mistakes in health insurance choices pose a major barrier to retirement preparedness for many employees. This research provides employers with essential data to support their employees in making these high-stakes decisions more effectively, and can improve the financial security of millions of Americans.”

Key findings include:

  • It is common for employees to choose a more expensive health plan, even when they account for all possible spending realizations and understand lower-cost options are available.
  • Employees who overpay for health insurance are significantly more likely to forgo matching retirement plan contributions, and a large majority of them saves less than reasonable benchmark levels for retirement.
  • Employees with lower salaries have higher rates of overspending on health insurance and undersaving for retirement, compared to those with higher salaries.
  • Employees with longer tenure generally have higher rates of overspending than younger employees or those with shorter tenure.

“This is one of the first empirical studies to conclusively show that high health insurance premiums can crowd out retirement savings,” noted Olivia S. Mitchell, Director of the Pension Research Council at the Wharton School of the University of Pennsylvania. “Plan sponsors will do well to note that retirement preparedness is closely linked to health plan premium levels paid.”

To view the full report, please click HERE.

Press Contact: John McCool, 888-200-4062, media@tiaa.org

About the TIAA Institute
The TIAA Institute helps advance the ways individuals and institutions plan for financial security and organizational effectiveness. The institute conducts in-depth research, provides access to a network of thought leaders, and enables those it serves to anticipate trends, plan future strategies and maximize opportunities for success. For more information about the TIAA Institute, visit www.tiaainstitute.org and follow us on Twitter @TIAAInstitute.

About the Pension Research Council
For over 65 years, the Pension Research Council/Boettner Center at Wharton School of the University of Pennsylvania has sponsored research on the entire range of private pension and Social Security programs, as well as related benefit plans in the U.S. and worldwide. Follow us on Twitter @PensionResearch and learn more at www.pensionresearchcouncil.wharton.upenn.edu

About TIAA
With an award-winning  track record for consistent investment performance, TIAA (TIAA.org) is the leading provider of financial services in the academic, research, medical, cultural and government fields. TIAA has $1.1 trillion in assets under management (as of 3/31/2020 ) and offers a wide range of financial solutions, including investing, banking, advice and education, and retirement services.