Hospitals Slower to Follow Retirement Plan Trends

“Hospitals have been slow to embrace changes in the retirement area,” Sally DeFelice, senior consulting actuary at Towers Watson, told PLANSPONSOR. For example, DeFelice pointed out, there has been a trend in the industry to move away from defined benefit (DB) plans to defined contribution (DC) plans, but the firm’s 2012 Benefits Benchmarking Study of the U.S. Hospital Industry found 54% of hospitals still offer defined benefit plans to new employees, compared to only 37% of other industry employers.  

One of the most interesting findings of the study for DeFelice is that hospitals, more than other sectors, are embracing hybrid plans. “The move from DB has resulted in a movement to account based plans, which includes DC and cash balance,” she noted, adding that the prevalent type of DB plan for hospitals is cash balance (32%).  

DeFelice said she reflected on this finding and decided it made sense because hospital workers are not as consumer-oriented as other groups. “Cash balance takes consumerism off the table; the company takes on the investment aspects, risks and decisions,” she stated. “Cash balance plans portray the simplicity of a growing account that [participants] don’t have to worry about.”  

“Reflective of the hospital industry lagging the pace of change in other industries, they are slow to adopt these features,” DeFelice said. Towers Watson found 42% of hospitals offer automatic enrollment, compared to 70% of employers in other industries. Automatic deferral escalation is used by 52% of hospitals versus 73% in other industries, and target-date funds (TDFs) are used as the default investment for 68% of hospitals versus 84% in other industries.In addition, 72% of hospitals offer an employer match contribution, compared to 95% of employers in other industries.  

“With hospitals lagging in making changes to their [retirement] programs, there is still significant opportunity to rethink strategies to achieve cost savings as well as improve benefit spend by using trends that have a greater ROI [return on investment] for their organizations,” DeFelice contended.  

One trend hospitals do seem to be keeping up with relates to providing health care benefits to retirees. “Interestingly, you could argue that hospitals would be more equipped to provide retiree health care programs; if you have the ability to provide services, cost should be more marginal,” Joey Dizenhouse, senior consulting actuary at Towers Watson, told PLANSPONSOR. “But for both pre-65 and post-65 retirees, health benefits are continuing to drop just as in other industries; retiree health benefits for new hires is low.”  

Dizenhouse explained that employers now have a mechanism for retirees up to age 65 to go get coverage—exchanges. Health care reform is providing a means for potentially all pre-65 retirees to obtain coverage.  

The Benefits Benchmarking Study found the use of health savings accounts (HSAs) and health reimbursement arrangements (HRAs) is increasing among hospitals, but, according to Dizenhouse, hospitals have been less apt to adopt account-based solutions because the so-called Cadillac tax in health care reform puts risk on plan sponsors who offer these plans, also. In addition, with these types of plans, hospitals cannot dictate where benefits are used and how they are applied.

“Most [hospitals] want [employees] to come back and use services provided by their employers, but with an HSA plan, they have less control of where employees can get services,” Dizenhouse said.