In the last few years, transformative business forces have and continue to challenge health care providers to achieve better outcomes, lower costs and improve population health.
These challenges include the Affordable Care Act and regulatory complexity, an aging workforce and critical-skill shortages including the evolving roles of physicians, disruptive competition and evolving care delivery models. Compensation and benefits can significantly impact a system's short- and long-term business and financial goals. In particular, when considering retirement benefits, there are several challenges and opportunities to improve costs, compliance and retirement readiness for the workforce.
The unique retirement landscape
The health care provider industry has some unique features that require deep knowledge and industry expertise when evaluating retirement plans.
Defined contribution (DC) plans can be 403(b) plans (ERISA or non-ERISA), 401(a) plans or 401(k) plans.
• Although employees of not-for-profit organizations can participate in a 401(k), the reverse is not true. For-profit employees cannot participate in a 403(b) plan.
• Even though 401(k) and 403(b) plans are substantially similar, they cannot be merged together, nor are all the available investment options the same.
• 403(b) plans are not required to test participant salary deferrals for nondiscrimination as long as salary deferrals are universally available to all nonunion employees.
• Non-ERISA 403(b) plans continue to be popular throughout the not-for-profit world. They are salary deferral arrangements for employees in which the employer has to be careful to avoid communicating to employees regarding a plan that it does not sponsor.
• ERISA 403(b) plans are subject to all of the fiduciary concerns and risks of a 401(a) or 401(k) plan — plan governance is a significant issue.
Defined benefit (DB) plans have been slower to be closed or frozen for large systems as compared to plans in corporate America. Retirement risk management is critical to these organizations given their low profit thresholds and the volatility of discount rates and investment returns for cost calculations. Recent bad news on DB pension costs has driven more organizations to a DC approach for providing retirement benefits. Other ways to reduce DB pension risk, like offering bulk lump sum windows to terminated vested participants and borrowing to fund, are highly utilized approaches in the health care industry.
Mergers and acquisitions are occurring at an accelerated pace in the health care industry. Given lean staff and the volume of these transactions, due diligence on retirement plans is often left until after the merger occurs, resulting in compliance issues, delays in consolidation of retirement programs, and unrealized efficiencies and economies of scale. Compounding these issues are HR systems (including benefits administration) that have suffered from a lack of investment.
Retirement readiness and financial well-being are important issues for the health care industry. If employees delay retirement only because they cannot afford to retire, costs increase, efficiency decreases and patient satisfaction may be adversely impacted.
Opportunities for health care providers
There are several opportunities for improving retirement plan management for health care industry plan sponsors.
• Plan harmonization results in more efficient and compliant benefit delivery along with improving governance to lower the risk of lawsuits and improve the efficiency of benefit delivery. If you have undergone or will likely be engaged in merger and acquisition activity, multiple plans from different acquisitions can be combined to reduce fiduciary risk, decrease administrative and investment expenses and facilitate the transfer of employees between different hospitals within the same health care system. Grandfathering of old provisions does need to be taken into account, however, in addition to compliance considerations, it protects long-term employees from drastic decreases in their retirement benefit and promotes retirement readiness.
Fiduciary oversight needs to occur on a regular basis and be well-documented.
Some areas for consideration include:
• Fee and service benchmarking, and investment structure reviews should be undertaken on a regular basis. These reviews should occur at least every three to five years.
• Payroll and other compliance reviews are important to avoid IRS and DOL penalties and ensure participants receive the benefits to which they are entitled. Performing these reviews every three to five years should allow plan sponsors to monitor and, if necessary, correct compliance risks.
Reducing DB pension risk is a process. Plan design, contribution policy and investment policy are critical for all DB plans. For closed and frozen DB plans, developing a road map to plan termination is the ultimate goal — even if it takes many years.
Retirement readiness analytics will allow plan sponsors to understand whether or not plans are designed to meet their goals and, more importantly, if participants are utilizing the plans appropriately. By performing this type of analysis, the sponsor can identify opportunities for improvement in plan design including adding more tax-effective options to the plan, offering auto-enrollment and auto-increases, and improving investment education and other communication vehicles.
With the unique aspects and extent of change taking place in the health care provider industry, top managers may lack insight into retirement plan issues that currently exist within their organizations. Specialists with industry expertise and a focus on retirement plans can develop proven diagnostic and strategy solutions to address the diverse retirement plan goals of a dynamic health system.
For more information, contact Michael Horton, Senior Consultant, Willis Towers Watson at michael.horton@willistowerswatson.com or Robyn Credico, Senior Consultant, Willis Towers Watson at robyn.credico@willistowerswatson.com.
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