If you're a hospital or health system executive, your retirement plan may be in danger of failing your financial expectations, and probably not for the reasons you think.
TriscendNP, an executive benefits broker, has found the vast majority of healthcare executives' retirement plans are underperforming by between 30 and 50 percent on average, thereby putting retirement funds at risk of not meeting desired expectations. When this happens, some senior executives who would otherwise be preparing to retire instead choose to continue working, interrupting carefully laid succession plans and throwing hospital leadership off balance.This was clearly not the outcome boards were expecting when they first implemented the program.
Fortunately, there are actions hospital leaders can take now to identify, target and rectify underperforming SERPs before it's too late.
The wrong assumptions
The success of every retirement plan depends upon the quality of the assumptions around which the plan is designed. Many healthcare organizations find faulty assumptions related to return rate and executive life expectancy drag down plan productivity, Vic Buzachero, corporate senior vice president with Scripps Health in San Diego, said during a May 10 webinar hosted by TriscendNP and Becker's Hospital Review.
Inaccurate return rate predications are detrimental to SERP performance, particularly if returns are significantly lower than expected. Some healthcare organizations that based retirement plans around traditional pre- and post-retirement interest rates of 7.5 percent a decade ago are startled to find realized rates currently hovering around 2 or 3 percent. Lower-than-expected returns can result in significantly smaller benefits funds when an executive comes to retirement age.
Outdated or incorrect life expectancy assumptions can also result in insufficient funds for retirement. As life expectancy steadily increases, some executives have found their plans are fiscally deficient as they prepare to end their professional careers, says Mr. Buzachero. Life expectancy for healthcare executives has increased from 83 years to 88 years during the past decade, meaning many executives with retirement plans designed 10 years ago are discovering their plans may not meet their needs.
Life expectancy assumptions often result in under-funded SERPs because the plan does not consider the unique demographic of its respective executive. For this reason, it's important not to use large population life expectancy tables when designing SERP plans for healthcare executives, says Mr. Edwards. "The life expectancy of the executives we [TriscendNP] service is well in excess of the typical mortality tables people were using in past to build these plans," he says.
Taken together, these two faulty assumptions greatly influence SERP effectiveness. Lower-than-anticipated interest rates compounded with longer-than-anticipated life expectancies have the ability to reduce net annual retirement benefits by nearly 50 percent, according to Mr. Buzachero.
Causes of underfunding
Re-examining key assumptions built into executive benefit plans can help healthcare organizations pinpoint design flaws hurting employee retirement objectives. However, a number of external factors can also negatively affect SERP performance, says Dale Edwards, principal and co-founder of TriscendNP.
Dips in the investment market can hurt SERP performance. Investment volatility encompasses return rate, sequence of returns and timing of returns. These factors significantly influence both the market performance and amount of money retirement plans produce. Due to the incredible volatility and unpredictability of markets, Mr. Edwards recommends healthcare organizations take advantage of financial tools that mitigate and divert market risk for employee benefit plans, such as collar equity products.
Costs that affect SERP funding include the financial products' underlying costs and fees as well as taxes associated with the overall plan. Currently, many organizations are moving away from actively managed funds and choosing financial products with lower associated costs, such as low-cost index funds. When choosing financial products for retirement plans, "healthcare organizations should consider the costs of financial products throughout the lifetime of the executive" to understand the realized expense load from costs, fees and taxes, says Mr. Edwards.
The right financial products
It is impossible to build retirement plans that accurately predict market volatility and precise life expectancy. Fortunately, organizations can incorporate certain financial products into their SERPs to manage and mitigate long-term unpredictability, said Bob Gutherman, principal and co-founder of TriscendNP.
Collared equity products, for instance, allow stakeholders to minimize market risks without giving up future gains. They work by taking an index, like the S&P 500, and collar plans to fit within a particular set of market rates. This prevents plans from incurring detrimental losses. "The key to successful retirement planning is to eliminate significant losses, even if it means capping your gains," said Mr. Gutherman.
TriscendNP offers a retirement plan, known as the Key Employee Engagement Program, which employs a collar to help clients ensure the success of their retirement plans. TriscendNP's plan generally incurs a 30-50 percent gain in SERP efficiency, which organizations can use to enhance employee benefits or funnel back into the organization to mitigate capital costs.
TriscendNP also offers a program called CAP-EX, designed to prevent the permanent loss of corporate capital through retirement benefit plans. Most retirement plans result in a permanent loss of capital for the organization. Triscend's CAP-EX employs a two-pronged financial strategy to recoup corporate capital, and even generate gains. The plan is comprised of two life insurance policies: one aimed exclusively at providing benefits to the executive and the other dedicated to generating repayment for the organization by leveraging interest rates.
Successful, high-performing retirement plans depend upon both sound strategy and strong financial counsel from vetted professionals. As hospitals and health systems build executive retirement programs, Mr. Edwards recommends taking advantage of the unique expertise offered by both compensation consultants and benefits brokers. Benefits consultants can help hospital boards determine how much executives should earn and where to set SERP objectives. Benefit brokers supply hospitals with the "how"to meet those objectives, such as innovative, high-performing plan design and risk-management expertise. By incorporating both financial counsel and risk engineering, hospitals and health systems can rest assured their executive retirement plans are performing as scheduled.
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