Healthcare sector modernizing retirement plans

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To attract and retain key talent, healthcare organizations have been updating their retirement benefit programs to look more like those found in the corporate sector, according to a recent survey of 87 hospital administrators and CFOs conducted by Transamerica Retirement Solutions and the American Hospital Association.

For example, there has been a shift in plan sponsorship from 403(b)s, which dropped to 72% in 2016 from 88% in 2015, to 401(k)s which rose to 49% from 38%. Also, only 27% of those organizations polled offer a defined benefit plan, of which only 28% are still active and 38% have frozen their plan. Among the reasons cited were longer life spans, as well as investment returns and interest rates falling short of assumptions.

“If you look underneath the hood of these healthcare systems, they’re becoming more complex and adopting a lot of corporate practices,” observes Brodie Wood, SVP at Transamerica.

The annual “Retirement Plan Trends in Today’s Healthcare Market” survey with AHA dates back 13 years. During that time, he has noticed a shift toward more healthcare systems working with a retirement plan adviser or consultants. The latest survey showed that it’s as high as 79%, whereas Wood says it was in 20% to 30% range more than a decade ago. In most cases that specialist is an investment adviser or securities consultant (46%), or an investment or benefits consultant (39%). In 10% of all cases, the adviser is an insurance or benefits broker.

Given this backdrop, the biggest retirement plan challenge was described as motivating employees to amass adequate savings. Indeed, plan participation rates fell to 70% for non-highly compensated employees from 78%, while remaining at 95% to 100% for highly compensated employees over the past three years.

Also see: “401(k), IRA account balances rise to record levels.”

But researchers identified even deeper concerns. For example, while 55% of healthcare organizations have an automatic enrollment feature, just 40% of have implemented automatic contribution increases and 71% set the auto rate at 3%. In addition, many of these organizations now limit their matching contributions to 25 cents on the dollar up to 5% of pay. That percentage more than doubled to 16% in 2016 from 7% in 2015.

“Employees aren’t saving enough,” Wood says, adding that defaulting employees at 3%, isn’t aggressive enough and doesn’t address longevity,

Competitive packages

But there are positive signs as well. For example, dollar-for-dollar matching climbed to 43% in 2016 from 35% in 2015. In addition, the number of plans matching at 5% doubled to 16% in 2016 and those matching at 6% tripled to 12% in 2016.

Given that healthcare is the core business of this sector, Wood says most of these organizations tend to have competitive health insurance packages. Strong retirement benefits can serve as a key differentiator to lure top performers, he says. Between an improving economy and relatively tight labor market, he expects the war on talent to heat up even more among health systems.

The biggest challenge for benefit brokers or retirement plan advisers serving the healthcare sector is overcoming commoditization, according to Wood. He says one promising path to a more successful practice with those clients is an ability to review the investments, admin piece and wind-down strategy of both DB and DC plans. This is particularly valuable considering how he says the former involves “a tremendous amount of risk and cost.”

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Healthcare industry Retirement planning Retirement benefits Retirement readiness 401(k) 403(b)