Data & Research July 11, 2014

Health Care Organizations Addressing Retirement Plan Engagement

Defined contribution retirement plan sponsors in the health care industry are becoming more proactive in their efforts to help employees adequately prepare for retirement.
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According to Transamerica Retirement Solutions report, “Retirement Plan Trends in Today’s Healthcare Market – 2014,” produced in partnership with the American Hospital Association, they are making adjustments to plan design that can help employees achieve retirement goals and also implementing programs that address the challenge of employee engagement. Seventy-five percent of sponsors surveyed said motivating employees to save adequately is the biggest challenge of managing a retirement plan. 

Plan sponsors in the health care industry still use participation rates as a measure of plan success, but the use of this metric is declining. Retirement readiness measures are gradually supplanting participation rates as reliable indicators of plan performance. Plan sponsors who utilize retirement readiness as an indicator of plan effectiveness increased to 35% in 2014 from 23% in 2012.

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Eighty-seven percent of surveyed plan sponsors indicated that their plan’s default deferral rates were not high enough. The number that offer automatic enrollment default deferral rates of 3% or less declined to 48% in 2014 from 70% in 2012, while the rate of those utilizing a default deferral rate of 5% or more nearly quadrupled during the same period.

While nearly four in 10 health care industry defined contribution plans offer 20 or more investments, there is a clear trend toward offering a more streamlined set of investment choices. The percentage of plan sponsors that offer 20 or more investments decreased to 39% in 2014 from 48% in 2012.

Transamerica’s survey also finds plan sponsors are addressing the challenge of employee engagement by implementing programs aimed at educating and informing participants. Because of the diverse needs of their employee populations, these sponsors employ a multichannel approach to communicate with their participants, including on-site representatives, meetings, customized print and electronic campaigns, investment advice and comprehensive financial planning.

“This year’s survey provides valuable insight into the changing landscape of the not-for-profit healthcare retirement plan market,” says Brodie Wood, vice president and national practice leader, not for profit markets. “It shows the unique challenges that healthcare retirement plan sponsors face and reveals trends that will reshape their retirement plans in the future.

Plan Design Trends

Nearly three-quarters (72%) of defined contribution plan sponsors in the health care industry offer a 403(b) plan in 2014, consistent with 2012. Of these 403(b) plans, nearly three-quarters (74%) are Employee Retirement Income Security Act (ERISA) plans. Twenty-one percent offer a Roth 403(b) plan. Forty percent of plan sponsors in the health care industry offer a 401(k) plan, with another 13% offering a Roth 401(k) plan.

A significant majority (89%) of plan sponsors in the survey utilize a single-vendor arrangement. When a multiple-vendor arrangement is used, the average number of vendors is two.

Ninety-four percent of all defined contribution plan sponsors in the health care industry offer some type of employer contribution. Although a fixed contribution is still the most common type of employer contribution (63%), this decreased significantly from 78% in 2012. A discretionary contribution, while less common (32%), increased dramatically from 17% in 2012. Only six percent do not offer an employer contribution at all.

A matching contribution is still the most common type of fixed employer contribution (69%). However, this decreased notably from 79% in 2012. A stated percent of salary, while still less common (41%) than a matching contribution, increased correspondingly (up from 31% in 2012).

The typical employer match formulas show a significant increase in the level of the match provided. The most common formula is $.50 up to 6% of pay (24%, up significantly from 15% in 2012). The next most common formula is $.50 up to 4% of pay (15%), followed by $1.00 up to 3% of pay (13%). The percentage of defined contribution plan sponsors in the health care industry offering a match of $.50 up to 6% or more of pay nearly tripled, to 11% from only 4% in 2012. The increase in level and amount of the employer match—in plans that do offer this type of employer contribution—speaks very well for plan sponsors' efforts to drive participants’ financial preparedness for retirement, Transamerica says.

Nearly four in 10 (39%) defined contribution plans of health care organizations offer more than 20 investment options (down markedly from 48% in 2012). Another 23% offer 16 to 20 investment options, and 29% offer 11 to 15 investment options. Isolating just 403(b) plans for health care organizations, the decrease in plans offering more than 20 funds is even more striking (33% in 2014, down from 49% in 2012).

Forty percent of plans use an automatic enrollment arrangement (up slightly from 38% in 2012), and 22% utilize automatic escalation as well. Within the health care market, 401(k) plans utilize automatic features to a significantly greater degree than 403(b) plans: Automatic enrollment is utilized by 54% of 401(k) plans (versus 35% of 403(b) plans), and automatic escalation is utilized by 29% of 401(k) plans (versus only 21% of 403(b) plans).

When participants are automatically enrolled, they are still most likely to be enrolled at a default deferral rate of 3% or less (48%); however, the percentage of health care industry defined contribution plans utilizing a default deferral rate of 3% or less has declined markedly from 70% in 2012. Correspondingly, utilization of a 4% default deferral rate has increased considerably to 36% in 2014 from 25% in 2012. Utilization of a default deferral rate of 5% or higher has nearly quadrupled, to 15% in 2014 from only 4% in 2012.

Target-date funds are the most popular default investment option, with 81% of plans offering this type of fund for automatically enrolled participants (increased from 58% in 2012). Balanced/asset allocation funds are used by 5% of plans, and custom model portfolios are used by 5%.

Eighty-six percent of health care organizations’ plans include a loan provision (up considerably from 79% in 2012). Twelve percent of participants have an outstanding loan, up from 10% in 2012. The median outstanding loan balance increased as well, to $5,900 in 2014 from $4,900 in 2012.

Nearly all plans in the survey (92%) include a hardship withdrawal provision. As with loans, there has been an increase in the average hardship withdrawal amount, up to $3,100 in 2014 from $2,200 in 2012. Nearly one in three plan sponsors (32%) reported an increase in hardship withdrawal activity in 2014.

The research reveals trends for defined benefit plans offered by health care organizations as well (see “More Health Care Organizations Bundling DB Plan Services”).

To request a copy of the full report on "Retirement Plan Trends in Today’s Healthcare Market - 2014," send an email request to marketinsights@transamerica.com.

The Markets July 10, 2014

Roth Accounts Can Improve Retirement Outcomes

The addition of a Roth savings feature to defined contribution plans is becoming more popular.
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The 2014 PLANSPONSOR Defined Contribution Survey finds that 52.4% of plan sponsors/respondents offer a Roth account in their plans and nearly 61% of the largest plans (those with greater than $1 billion in assets) offer a Roth account. In addition, Rob Austin, director of retirement research with Aon Hewitt says Aon Hewitt research found 50% of employers surveyed in 2013 offered a Roth account, compared with only 11% in 2007, and the Vanguard Center for Retirement Research finds that for large plans administered by Vanguard, 52% offered a Roth account in 2013, compared with 46% in 2011 and 37% in 2009. Vanguard’s findings show that for small plans, the percentage of those offering Roth plans is even higher (73%).

“The adoption of Roth features is definitely rising,” Jean Young, senior analyst, Vanguard Center for Retirement Research, tells PLANADVISER. Roth accounts appeal to a broad segment of employees, she says, offering advantages to employees from a tax standpoint. Young, who is based in Valley Forge, Pennsylvania, explains that because taxes on Roth contributions are now instead of later, this helps to alleviate some of the worry that employees may have about what their tax rates will be once they retire and during their years in retirement.

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Austin agrees that tax considerations are an important part of why Roth accounts appeal to employees. Austin, who is based in Charlotte, North Carolina, tells PLANADVISER, “What it comes down to is that if a person believes that their taxes are going to be higher in retirement than they are right now, then people prefer to pay the taxes now.” He notes factors that can play a role in determining an employee’s tax bracket during retirement include state income tax and cost of living where an employee resides during his or her retirement years.

“From the employer standpoint, if there’s demand by employees for a Roth feature, then there’s no reason not to have it,” says Austin. From an informational standpoint, he says, explaining the difference between Roth contributions and non-Roth contributions to employees is no less confusing than explaining the difference between investing in one stock versus another. “Giving employees additional options like Roth accounts adds value to your company’s retirement plan,” says Austin.

The statutory limit for employee deferrals (the 402(g) limit)—currently $17,500—applies whether deferrals are pre-tax, after-tax or both. Austin explains that employees can use all of that amount on pre-tax contributions or all of that amount on Roth contributions, or a combination of both.

As to whether Roth accounts can help improve employees’ retirement readiness, Young says, “If an employee makes the same deferral amounts with Roth as they would with a pre-tax account, upon retirement, more assets will be available.” This is because the tax has already been paid on the Roth contributions and any appreciation of the account is not subject to taxation, she explains.

Austin also sees Roth accounts as a means of boosting the retirement readiness of employees. “When Roth is available to and used by employees as part of their retirement plan, people tend to save more,” he says. More specifically, he cites Aon Hewitt research that for those saving via a Roth account, the average deferral rate is 10.2% versus 7.7% for those using a non-Roth account.

DC Roth Accounts and Health Care in Retirement

The tax advantages of Roth accounts can also impact decisions concerning health care during retirement, according to Ron Mastrogiovanni, CEO of HealthView Services.

The Danvers, Massachusetts-based Mastrogiovanni tells PLANADVISER, “Employers are doing whatever they can to ensure that their employees are ready for retirement and that includes health care. Roth accounts can impact health care costs during retirement in that the taxes paid on Roth contributions don’t fall under MAGI, or modified adjusted gross income, which is used to determine Medicare premiums, parts B and D, paid during retirement.” He adds that employers want their employees to retire when they want to and to avoid having to work an extra number of years to pay for health care costs. So, explaining to employees the benefits of using a Roth account, when it comes to Medicare premiums, is important.

“Inflation will eventually translate into higher earnings for employees. Social Security benefits will grow slowly and will be included in the means testing calculation under MAGI. And savings will eventually be counted as earned income,” says Mastrogiovanni. The result will be that more retirees will end up in high income brackets and thus pay more for Medicare, he says, unless they can use after-tax retirement vehicles such as Roth accounts to lower their income bracket. “With Roth, employees are paying taxes now on their account balance and know they are not going to get hit with it later,” he adds.

Who’s Using Roth Accounts?

Austin says younger employees are using Roth accounts the most, since they are dealing with a longer time horizon. He cites Aon Hewitt research that 17.2% of those between the ages 20 and 29 use Roth accounts compared with only 8.9% of those between ages 50 and 59, and 5.7% for those age 60 and above.

Young agrees that younger employees, as well as those having a relatively short tenure with the company, are more likely to use Roth accounts. She cites Vanguard research that for those with one year or less of tenure, 20% of this group use a Roth account, while those with between one and three years of tenure have a similar usage rate of 17%.

The type of industry in which an employee works also seems to play a role in usage rates for Roth accounts, according to Young. Again citing Vanguard data, Young says the top five industries for employees using Roth accounts include: business, professional and nonprofit (17%); agriculture, mining and construction (16%); wholesale and retail trade (16%); education and health (16%); and media, entertainment and leisure (13%).

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