Open Enrollment mistakes to avoid
Pretty much everyone has to deal with Open Enrollment at multiple times in their lives. This is the process where you enroll yearly for benefits, either with your employer or medical insurance outside your employer. This activity can be confusing and mistakes made here can cost you through the entire year. These are the areas where you will need to work through. Many of these are not offered at every employer and if you are self-employed or a contractor, you may only be enrolling in Health Insurance through various exchanges.
The most important and expensive decision in this annual process. In many cases you will have a large list of options and it can be challenging to choose and understand. If you are relatively healthy, young, have no children and no existing conditions, the decision becomes much easier. As with all insurance, the simple rule of thumb in that case is to commit to paying the least amount per month and assume the risks of higher costs in the event of need. This will make doctor visits, emergency room visits, lab tests, etc. more expensive at the time of purchase, but the overall annual costs over a period of years will be considerably less. Frankly, even if you are less healthy or have children, selecting the lowest monthly cost option is typically going to be close to the best choice. It’s just getting over the mental hurdle of higher cost doctor visits and understanding the annual costs are what is important, not individual visits.
I should comment that High Deductible Health Plans (HDHP) that are Health Savings Account (HSA) eligible are almost always the best annual deal for healthy and young people. There are many advantages to being able to put savings into an HSA that can act as a powerful mechanism for tax advantages. A future post will address this is much more detail.
I will have a future post that will be devoted to Health Insurance decisions, but a good overview on the many decisions is here: http://time.com/money/4501380/best-health-care-plan-open-enrollment/
Typically, if your company offers this as an option, you won’t have that many choices of plans or insurers. There is a simple trick to save a lot of money on both Vision and Dental insurance, just skip years and only insure yourself and family every other year. This only works if you are getting this insurance through an employer, since insurance purchased outside an employer’s plan typically requires continuous insurance. Getting vision tests typically is only needed once per year and most vision insurers only allow new frames every other year anyway, so why keep insurance every year. Just time your visits and vision purchases to be at the beginning or end of the insured period, typically December and January. I assume insurance companies hate this, but they don’t do anything about it.
If you have no vision problems and don’t wear corrective lenses, you could completely skip insurance, but it is typically recommended that you get your vision tested regularly. You have to weigh the annual cost of the insurance versus going to an optometrist or Lens Crafters and paying for the test out-of-pocket. Normally it is about the same price and if so, it won’t be worth it until you need corrective lenses.
Similar to vision insurance, if your company offers this as an option, you won’t have that many choices of plans or insurers. There is a simple trick to save a lot of money on both Dental insurance, just skip years and only insure yourself and family every other year. This only works if you are getting this insurance through an employer, since insurance purchased outside an employer’s plan typically requires continuous insurance. The difference with dental insurance is that many dentists recommend checkups more frequently than annually.
There are multiple decisions that need to be made on the amounts and investment choices. While it is included in the Open Enrollment section here, your decisions can normally be changed as much as you like throughout the year without restriction, so the risk of a bad choice are much lower.
The simple advice here is to contribute the maximum you can afford or at least the minimum to get a company match, if one is offered. For 2017 and 2018, if you are under 55 this is $18,000 per year. Over 55 can contribute $24,000 per year. This maximum will periodically be increased by the IRS. The unfortunate reality is that most can’t afford that level of contribution, but it should always be your first choice for saving if you have no other debt to pay off other than a mortgage.
When you are young, this is the one area where many people compromise and fail to contribute or under-contribute since retirement seems so far off. The high level of savings will certainly compromise your lifestyle. If you are fortunate enough to have your contribution matched by your employer, you absolutely must at least contribute this percentage to take advantage of this huge benefit. Unfortunately, each company has a different policy for when you are vested in the company contributions. If you do not intend to stay at the company long enough to receive the vested company contributions, then it isn’t as critical to contribute that minimal amount to receive the matching contribution.
Traditional or Roth 401k
This decision is easy if your employer does not offer the Roth option. The difference between the options is that the Roth option takes the money out of your paycheck AFTER you’ve paid taxes on it while the Traditional 401k takes it out prior to taxation. Unless you are very early in your career and expect to have much higher earnings in retirement than you have now, it will almost always be better to choose the Traditional 401k over the Roth. The Traditional 401k gives you an immediate tax benefit and doesn’t rely on you having a lower tax rate in retirement to get the benefit.
Typically you’ll have anywhere from 4 to 50 or more choices here and it can be especially confusing. Look at the following for each of the options:
- Expense ratio. This is the most important thing to look at. Sometimes this is easily found, sometimes it is very difficult to get, but they legally have to show the participant the value somewhere in the sign up material. 401k plans will frequently be far too expensive and many of the options are also too expensive for what you are receiving, but there are ways for you to at least reduce the costs.
- Index funds. Hopefully most, if not all, of your choices are index funds. Fortunately, index funds are always cheaper than funds run by a manager. Note, sometimes the name of the fund does not have “index” in it. It could be a “fund of funds” or “basket” of index funds, which is also fine. Just read the material given to you by the employer to confirm if it really is an index fund.
- Asset Classes. If this is your only retirement savings, you should attempt to mimic a three-fund portfolio that spreads your investment equally among US Stocks, Bonds and International Stocks. Even the weakest 401k plans will have at least one offering in each of these asset classes. Unfortunately, sometimes they will not all be index funds or low cost. If you have other retirement assets outside this 401k in something like an IRA, you have more flexibility to not have to invest in all three asset classes.
Employee Stock Purchase Plan (ESPP)
This benefit is obviously only offered by public traded companies and can be a nice benefit, but can be confusing on how to best take advantage of them. These plans allow you to purchase your employer’s stock at a discount that is anywhere from 5% to 15% less than the market rate. The good news is that there really isn’t a decision, you just do it. It is risk free money, which is hard to find. The simple steps are:
- Confirm the plan allows you to immediately sell your shares after you have purchased them. This should never be an issue.
- Purchase as much stock as allowed. The drawback here is that a portion of your paycheck will be tied up from 3 to 12 months during the offering period while you wait for the shares to be purchased. So having the ability to tie up your cash for that long is the only obstacle. But the more you can purchase, the bigger the risk free income.
- Always sell your shares immediately after purchase. You don’t want to hold individual stocks, especially the stock of your employer, since that concentrates too much risk in a single company. There are tax implications discussed here on Fairmark’s site, but these are trivial and shouldn’t preclude you from participating and selling. You won’t pay any more tax than regular income.
This is an excellent article on the details of ESPPs from Fairmark, but I do not agree with holding the stock that you purchase, you should sell it as soon as possible to avoid the risk.
Disability Insurance or Accidental Death and Dismemberment (AD&D)
If you have dependents that rely on your income or you haven’t yet saved enough to be Financial Independent, it is imperative that you have disability insurance. In many ways this can be more important than life insurance. When you die, at least no one needs to continue to support you. If you are disabled, depending on the disability, you will still need to support yourself and your dependents. Unfortunately, for employer offered AD&D insurance you typically must be completely and totally disabled on a permanent basis to collect long term disability. You can not find another job or career that can work around your disability and still collect the benefits. For this reason, I’d strongly recommend you purchase disability insurance from an insurance company other than your employer unless your employer defines it as a comprehensive disability policy. Many employers do offer a “free level” of disability insurance, so you should obviously accept that, but don’t expect it to really cover your disability.
If you have dependents depending on your income, you must have life insurance. Unlike disability insurance, though, if you have no dependents, do not purchase this insurance through your employer or elsewhere. This is one of the most foolish purchases that can be made if no one actually relies on your income. Many employers offer this benefit, but it probably won’t be enough or a better price than a term Insurance policy you can purchase outside your employer. You can shop prices on term4sale.com. You can certainly purchase a subsidized plan from your employer, but supplement it with Term Life insurance purchased elsewhere.
This is a good article on how much life insurance to buy.