1st Quarter 2010
One aspect in our troubling economy that seems to be flourishing is the growing number of employers implementing consumer-driven health (CDH) plans and wellness programs. This article describes the primary areas of participant behavior that consumerism seeks to change and the fundamental factors a “consumer-focused” health care strategy must include. The authors outline issues employers must address when designing a successful incentive program and its accompanying communications strategy. A case study of a company that has a 70% enrollment rate in its CDH plans shows how an integrated consumerism and wellness strategy can slow the rate of health care cost increases for both the employee and employer.
Health savings accounts (HSAs) have altered the health care landscape in ways no one might have predicted. HSAs have emerged as a valuable tool in the quest to change consumers' health care spending behaviors and better manage health care costs. This article compares and contrasts HSAs to various other health care spending accounts, addresses various HSA topics in the context of HSAs' first six years, and speculates on the future of HSAs. The authors identify policy changes that could help expand HSAs, drive further employer savings, make HSAs more userfriendly, impact employee satisfaction and increase adoption rates.
One of the contributing factors to both the increase in health care costs and the backlash to managed care was the lack of consumer awareness of the cost of health care service, the effect of health care costs on profits and wages, and the need to engage consumers more actively as consumers in health care decisions. This article reviews the birth of the health care consumerism movement and identifies gaps in health care consumerism today. The authors reveal some of the keys to building a sustainable health care consumerism framework, which involves enlisting consumers as well as other stakeholders.
Employers affected by the recession's 2009 peak must press for cost containment in 2010, especially in health care benefits. Encouraging employee consumerism—through consumer-directed health plans and other strategies—can be enhanced by incentives, but federal efforts at health care reform add some element of uncertainty to the consumer-directed solution. This article provides some lessons to guide the course of action for employers considering implementing a consumerist approach to improve employee health and control cost trend.
Do consumer-driven health (CDH) plans have the potential to help create a more affordable, sustainable (i.e., multiyear), high-quality health care system? Or do they merely shift costs and cause individuals to forgo care? For the past four years, CIGNA has compared actual claims data of individuals covered in its CDH plans with those of its traditional health maintenance organization (HMO) and preferred provider organization (PPO) plans, among the same employers. The results consistently show that properly designed CDH plans deliver lower medical and pharmacy costs without sacrificing care or shifting costs. And CDH plans, if designed properly, increase preventive care and, on average, individuals tend to receive a higher level of care while costs are reduced. If health care reform goals are to be achieved, well-designed CDH plans should play a significant role.
Although over half of employers currently offer a consumer-directed health plan (CDHP), the median plan enrollment rate for individual companies is low, at just 14%. This article explains factors underlying low enrollment rates by reviewing the history of CDHPs and examining whether CDHPs have lived up to their initial value proposition in terms of cost reduction and consumer behavior change. The author identifies the sentinel effect that CDHP concepts have had on traditional plans and where further actions and developments are needed to change employee behaviors and increase enrollment in CDHPs.
The prevalence of the consumer-driven approach to health care will dramatically increase in the years ahead. This article first looks at the ongoing health reform debate to see the limited impact it will have on consumer-driven health care. It also looks at the current limits of the reform conversation, within the context of several societal trends that will collectively drive the longer-term development of consumer-driven plans. While health reform may tinker around the edges of what tools are available, these broader trends all point toward greater and greater consumer involvement in both health and health care. At issue is whether the current consumer-driven model can adapt to accommodate these changes.
2nd Quarter 2010
The current economic crisis shows that employers that scrimped for the sake of short-term savings on retirement spending, especially on defined benefit plan offerings, set themselves up for lasting cost consequences and workforce management disruption. As a result, many companies should rethink their approaches to the retirement security they provide their employees. Where possible, employers should consider a mixed program that combines the growth possibilities of a defined contribution plan with the security of a defined benefit plan. This article reviews the makings of the current employer situation and explains the benefits of such a mixed program.
Since the recent economic downturn, Americans have become more concerned with guarantees and stability than they are with investment returns. At the same time, employers are beginning to recognize the role they can play in providing employees with options for creating guaranteed lifetime income streams from their defined contribution
plans. The author discusses different ways employers can structure the income component, the advantages and disadvantages of each approach, and what factors employers should consider when deciding which of those options is most appropriate for their employee population.
Throughout the history of employee retirement plans, changing market conditions have prompted employers to periodically rethink their retirement benefit plans. The earliest pension programs in the United States were noncontributory, defined benefit (DB) plans funded exclusively by employers. Then the Great Depression and the enactment of Social Security swung benefits in a contributory direction for several decades. A shift back toward noncontributory plans started during World War II, but with the advent of 401(k) plans, beginning in 1981, once again the momentum turned toward greater employee cost sharing and the defined contribution (DC) model. Today, thinking has begun to shift again, back to the idea that employees need the guarantee of a DB plan—but that they should still play a contributory role in the accrual of their retirement assets. This article traces the logic of these changes and proposes an updated version of the old contributory DB plans as an antidote to the insecurity of DC plans.
Retirement programs vary in their methods of paying benefits, in the choices they offer participants with regard to benefit payout, and in their communications about payouts during retirement. The Society of Actuaries has conducted research on how individuals invest their funds during retirement and the impact of economic change on that investment. The Society of Actuaries Retirement 20/20 initiative has explored the payout period and how different signals impact retirement decisions and behavior. This article looks at issues with regard to structuring payouts, provides some comparative information about practice in and outside of the United States, and draws on Society of Actuaries research and related Retirement 20/20 work. It also discusses some of the policy issues likely to be raised in the years ahead.
Today’s workers will retire in an environment with fewer pension plans, greater reliance on individual savings and Social Security’s uncertain future. As a result, employees need help making the transition from saving for retirement to managing income during retirement. This article describes steps employers can take to help employees make such a retirement transition and, in turn, maximize return on the plan sponsor’s investment in funding employee retirement savings. Helpful employer steps include calculating both individual- and plan-level replacement ratios, bringing in financial professionals to counsel employees, and targeting communications for both younger and older workers.
The authors of this article use historical returns and interest rates to model the effects of financial markets volatility on the retirement security of workers. They demonstrate that, even over short periods of time, market volatility can produce significantly different defined contribution (DC) plan retirement outcomes for workers with otherwise identical contribution rates, salary and investment strategies. Their model also shows that by transferring some investment risk and opportunity to the plan sponsor, a cash balance defined benefit (DB) plan produces steadier but typically lower retirement outcomes than those derived from DC plans. The authors conclude that a reasonable inference is that the mixed strategy of a DB plan with a market-sensitive DC plan is better than simple strategies using a single approach.
3rd Quarter 2010
Despite a growing gap in retirement income adequacy, much of employers' focus has been based on internal and external benchmarks and “throwing money” at the problem. The current economic environment offers employers a unique opportunity to better meet employer and employee objectives by becoming an “enabler” rather than a “provider” of retirement benefits. By changing roles from providers to enablers, employers can increase productivity by optimally aligning the design and cost of total rewards with organizational objectives and employee values. In addition, employers acting as an enabler can reconfigure benefit programs to maintain flexibility in managing through future downturns and provide greater financial wellness value to employees at lower cost than employers that fail to redefine their role.
Phased retirement programs are one clear solution to several social realities: the global economic recession, health care cost uncertainty, the potential labor force effects of an aging baby boom population and increases in postretirement life expectancy. This article reviews the case for using phased retirement, the questions employers must answer in designing phased retirement programs, and how current laws and regulations affect program options. The authors explain why a successful phased retirement plan must be aligned with a company's overall benefit program, and how such alignment could be facilitated with changes to current laws and regulations.
If defined contribution (DC) plan sponsors haven't already done so, they soon will be giving serious consideration to providing retiring plan participants with options to convert at least a portion of their savings into retirement income. Only time will tell whether employers will be encouraged to make those options available to participants or required to do so. Either way, trial annuitization — a concept that builds on the DC industry's success with automatic enrollment and automatic increase—is worth exploring further and may be a concept whose time has come.
To improve the way pensions are provided to American workers, the U.S. pension system's laws and regulations should be updated to reflect the decline in defined benefit (DB) plans and the increasing role of 401(k) plans. For 401(k) plans, the author recommends better fee disclosure practices and two-tier regulation that would depend on a plan's primary or secondary role. To strengthen DB plans, the author proposes several legal and regulatory changes that would protect workers who are laid off or change jobs and increase plan design and funding flexibility.
Many challenges face the U.S. retirement system today. Some advocates believe that with fine-tuning and incremental changes, improvements are possible, and they tend to focus on system successes. Others believe that the appropriate solution is total redesign, effectively starting with a blank sheet of paper. They tend to focus on the gaps and failures. This article provides recommendations for retirement security built on an overview of the current system's successes and failures, as well as some areas where success or failure remains less clear. The categorization of success or failure is purely based on the author's judgment, not any objective rating system. The recommendations are grouped into five categories and encompass both defined benefit and defined contribution plans.
Changes in the economy, worker demographics and the U.S. voluntary retirement system over recent years and decades have led to questions about what role 401(k) plans will play in determining current and future workers' retirement incomes and whether those incomes will be adequate. This article reviews a number of simulation estimates that the Employee Benefit Research Institute (EBRI) has developed since 2003. As a whole, the estimates indicate that the adequacy of current workers' projected retirement incomes and the role 401(k) plans will play in determining them depend on a number of variables. These include how retirement income adequacy is measured, workers' current ages and other demographic characteristics, and how changes to laws and regulations pertaining to 401(k) features— namely, automatic enrollment, automatic contribution escalation and target-date funds—will affect retirement income adequacy for both current 401(k) participants in particular and the current population of U.S. workers in general.
4th Quarter 2010
Even though most plan sponsors realize they need to do more to manage 401(k) plan fees because such costs directly impact participants’ retirement wealth accumulation, fiduciaries face challenges obtaining full and complete plan fee information, interpreting the results, and understanding what options are available and which to select. This article dissects the various types of fees within 401(k) plans and outlines specific steps plan sponsors can take to make sure their own plan’s fees are competitive and their fiduciary risks are minimized. Disclosing fees in a way that not only satisfies existing legal requirements, but also is simple and meaningful, will go a long way toward giving employees comfort about the value of their plan. By following these steps, employers will gain knowledge, control and confidence to identify and manage fees now and over time.
Defined contribution (DC) plan management is an industry-wide workforce management issue, yet employers traditionally approach it like a game of “hot potato”: Whoever ends up with the older worker who is not able to retire is stuck with the problem. Instead of treating employees’ difficulties in achieving retirement income adequacy as a problem to be “kicked down the street,” employers should shift their approach to DC plan management. This article discusses the benefits of shifting away from a traditional transactional based approach toward an outcomes-based one, and how this shift applies to automatic plan features, target-date fund selection and other plan issues. Finally, the author describes considerations and trade-offs employers should take into account when deciding where their own plan approach belongs along the transactional-versus outcomes-based spectrum.
Employee benefits represent an investment from which companies derive value and should be managed in line with an overall business strategy rather than written off as an expense. MetLife research has found that most companies fit into one of four profiles when it comes to their approach to employee benefits. This article explains each profile and illustrates how employers and brokers can take a more strategic and rewarding approach to employee benefits programs.
Plan sponsors can benefit in many ways from thawing out their frozen pension plans: There’s a lower net cost than a defined contribution/401(k) plan, and asset-liability matching strategies can effectively neutralize the volatility. Plus, employees receive a guaranteed return, without having to manage investment risk.
Phased retirement can be a good workforce planning tool. However, barriers make it virtually impossible to design any formal phased retirement programs that are compliant with current laws and regulations and workable for all companies within all industries. This article reviews two types of barriers. The first type is those arising from current laws and regulations, such as those applying to employee benefits, age discrimination, anticutback rules and nondiscrimination standards. The second type is issues within a company that impede implementation of formal phased retirement programs, such as the structure of jobs, the type of employees and the company organization. The author concludes that retail, financial services and health care industries are generally better suited for offering formal phased retirement arrangements than companies in other industries, and new regulations must replace current ones in order to provide employers with more flexibility in designing phased retirement programs.
This article develops a rating system for free, Internet-based retirement planning software that assumes unsophisticated users. The rating system takes into account two of the most important sources of retirement income—Social Security and investments— and the two main determinants of retirement income needs—the length of the planning period and the target replacement rate or target retirement income. The small sample of programs rated suggests that programs tend to do a poor job in the way they handle Social Security benefits. Some of the programs appear to have an anti-Social Security bias.
The Medicare Prescription, Drug, Improvement, and Modernization Act of 2003 provided a subsidy to employers that offered a retiree health prescription coverage benefit actuarially equivalent to Medicare Part D. This article reviews the development of the subsidy, the support by the federal government and the issues that have arisen. It also presents analysis of data from a set of companies that offered retiree health in 2006 and 2007. The data show widespread acceptance of the subsidy and continuance of prescription coverage; however, companies that did not take the subsidy were more likely to be smaller and in less robust financial health. Analysis of a subset of the companies shows the magnitude of the benefits paid yearly and the accounting liability caused by retiree health relative to the size of the subsidy. The author concludes that the potential success or failure of the federal subsidy in preserving retiree health benefits will not be known for years. Nevertheless, with the elimination of the deductibility of the subsidy in the Patient Protection and Affordable Care Act (PPACA), employers surely will reexamine their offer of prescription coverage to retirees.