Health Care Organizations Move From 403(b)s to 401(k)s

The health care industry is facing considerable headwinds, according to Transamerica, not least of which is the possible replacement of the Affordable Care Act, rising prescription drug costs, shrinking resources to pay for emergency services and a shortage of nursing staff.

To retain and attract staff, many health care organizations have been shoring up their retirement plans and, in many cases, updating them to look more like those found in the private sector. Transamerica found that many health care organizations are moving away from 403(b) plans to 401(k) plans. The number of health care organizations with 403(b) plans dropped from 88% in 2015 to 72% in 2016, while those sponsoring 401(k) plans rose from 38% to 49% in that timeframe.

Fewer health care organizations are also sponsoring defined benefit (DB) plans; today, only 27% have a DB plan, and out of these, 38% have frozen their plan.

“The low interest rate environment has made it difficult for these defined benefit plan sponsors to reach assumed rates of return on investment assets, and any potential interest rate increases over the next five to 10 years might put further pressure on defined benefit plans as bond prices decline,” says Brodie Wood, senior vice president at Transamerica. “For these reasons, many health care organizations have little choice but to freeze their existing DB plans and seek ways to terminate frozen plans.”

Among health care organizations with a defined contribution plan, only 70% of non-highly compensated employees participate in them, whereas 95% of the highly compensated employee group does. To boost participation, many health care organizations are trying out stretch matches, and 55% now automatically enroll participants. Forty percent automatically increase contributions.

However, among those with automatic enrollment, 71% use 3% as the initial deferral rate. Sixty-six percent now use target-date funds (TDFs) as the qualified default investment alternative. Eighty percent of health care organizations work with a retirement plan adviser or securities broker, and many require providers to deliver on-site meetings for their staff. In fact, 66% have a full-time plan representative on site from their service provider.