Benefits June 18, 2013

Are Your Participants Too Conservative?

June 18, 2013 (PLANSPONSOR.com) – Participants have a disconnect between portfolio allocations and their understanding of risk, according to a speaker at the (K)onvergence Summit in New York.
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A survey from MFS Investment Management—outlined during a panel at the event—found 46% of respondents said they view their retirement assets as savings, not investments.

Fewer than half (44%) of Gen Y investors, who have time on their side, consider themselves aggressive investors. Even among those who do, they pick a conservative option when asked to select a hypothetical investment, MFS found.

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More than half of the Gen Y investors (55%) consider 401(k) assets savings rather than investments—a higher number than those who take this conservative view among Gen X investors (only 42% consider their plan assets as savings), and Baby Boomers (44% of whom have this view).

Gen Y is overconfident about retirement, but perhaps wrongly so because of their conservative view of investments despite having a long savings horizon, explained panelist Kristen Colvin, director of consultant relations at MFS. This generation unrealistically expects to generate a 9% return on a portfolio with 35% allocated to fixed income, she added.

All generations seem to have trouble understanding the connection between their allocations and risk, said Ryan Mullen, senior managing director at MFS. The typical participant expects to earn 8% annually, even though on average, participants have one-third of their assets in conservative investments. They also do not see the underperformance of their assets as a major risk to their retirement, the survey found.

Forty-one percent of plan participants identify themselves as aggressive investors, but when asked how they would invest a hypothetical sum, more than one-third (36%) express a desire to invest conservatively. Their actual allocations to conservative choices (31%) like bond and money market funds—are also higher than would be expected from truly aggressive investors.

For investors who describe themselves as conservative, 43% have no idea how their 401(k) assets are allocated, he added.

Mullen and Colvin shared several tips for helping participants understand and manage risk including diversifying, but at the same time simplifying, the plan design. They also suggested providing employee guidance and tools to help participants understand what they are investing in.

Plan sponsors should use terms participants can understand (like growth, income, inflation and liquidity) to simplify the core menu. “The point is thinking about communicating investment lineups to participants in ways that they can understand,” Colvin concluded.

Benefits June 18, 2013

PwC Projects Slowdown in Health Spending Growth

June 18, 2013 (PLANSPONSOR.com) – Health care inflation in the U.S. is projected to dip to 6.5% in 2014, according to PwC's Health Research Institute (HRI).
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In its annual report, “Medical Cost Trend: Behind the Numbers,” PwC says the ongoing slowdown in the health care growth rate defies historical post-recession patterns and is likely to be sustained even as the Affordable Care Act (ACA) adds millions more newly insured Americans to the health system next year. According to HRI, structural changes within the industry are helping to contain costs and deliver care more efficiently.  

Consumers, meanwhile, who are paying a greater share of the cost, are making spending adjustments. Many are delaying care, using fewer services and choosing less expensive options such as retail clinics, urgent care centers and mobile health devices.  

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Medical cost trend—or growth rate—reflects changes in the actual cost to treat patients and is influenced primarily by the cost of products and services and the number of services used, or per capita utilization. The trend is a key ingredient in setting insurance premiums. After accounting for likely changes in benefit design, such as higher deductibles, HRI projects a net growth rate of 4.5% in 2014.  

Major employers are beginning to contract directly with big-name health systems to tackle expensive and complex procedures for employees, such as heart surgery and spinal fusion. According to PwC’s Touchstone Survey, 33% of businesses are considering high-performance networks over the next year. Early data suggests this could mean as much as a 25% reduction in costs.  

In the report, PwC’s Health Research Institute (HRI) examines the factors that serve to inflate or deflate the medical cost trend. The eighth annual report also includes findings from PwC’s Touchstone Survey of large employers and provides a growth rate projection for the year ahead.  

More information is at www.pwc.com/us/MedicalCostTrend.

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