Data and Research January 31, 2017

Retirees Have Limited Control Over Health Care Inflation

In 2013, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 13%.
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A new analysis out from the Employee Benefit Research Institute (EBRI) suggests projected savings targets needed to cover health care in retirement went up last year, after several years of decline.

Health care cost projections for retirees indicate major challenges ahead, EBRI explains, but they are actually generally lower than they were five years ago.

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“While there are various factors at play, the main reason for the increase in needed savings is related to the yearly adjustment for out-of-pocket spending for prescription drug use,” observes Paul Fronstin, director of EBRI’s Health Research and Education Program and co-author of the annual health savings analysis. “Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.”

EBRI warns that its analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income. Thus, “many individuals will need more than the amounts cited in this report,” Fronstin suggests.

“Some workers will actually need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare if they receive health benefits as active workers,” he adds. “The range of increases depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand … Specifically, EBRI found, in 2016, a 65-year-old man would need $72,000 in savings and a 65 year-old woman would need $93,000 if each had a goal of having a 50% chance of having enough savings to cover health care expenses in retirement.”

NEXT: More from the EBRI analysis 

EBRI finds that to have a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

“Not surprisingly, those with high prescription drug costs would need to save substantially more,” Fronstin says. “For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings would be $349,000 in 2016.”

As Fronstin explains, the EBRI analysis updates previous estimates on savings needed to cover health insurance premiums and health care expenses in retirement: “As before, it points out that projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, which is why the analysis provides [a range of estimates].”

Fronstin further observes that “Medicare was never designed to cover health care expenses in full … In 2013, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 13%.”

The full report, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000,” is published in the Feb. 1, 2017 EBRI Notes, online at www.ebri.org. 

Compliance January 31, 2017

Aon Hewitt Targeted in Kickback Lawsuit Filed by Caterpillar Plan Participants

The central claims in the proposed class action suggest plaintiffs feel they overpaid significantly for advisory services, with the excess payments essentially amounting to kickbacks returned to the defendants.

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The latest example of Employee Retirement Income Security Act (ERISA) industry litigation targets Aon Hewitt for, in the words of plaintiffs, permitting excessive fees to be paid and then taking kickbacks.

The challenge was filed in the United States District Court for the Northern District of Illinois, Eastern Division. Lead plaintiff Cheryl Scott commenced the action on behalf of herself and similarly situated participants in the Caterpillar 401(k) Retirement Plan. Named as defendants are a number of Aon Hewitt companies, including Aon Hewitt Financial Advisors, Hewitt Financial Services and Hewitt Associates.

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According to the text of the complaint, Scott is a retiree and a participant in the Caterpillar plan, while defendant Hewitt Associates serves and has served as the recordkeeper. Another provider, Financial Engines, is also named in the text of the suit but is not actually challenged as a defendant.

The central claims in the proposed class action suggest plaintiffs feel they overpaid significantly for the services provided by Financial Engines, with the excess payments essentially amounting to kickbacks returned to defendant Hewitt.

As the text of the lawsuit lays out, “Scott and the other plan participants who signed up for the service received advice from the third-party firm Financial Engines Advisors. For periods prior to 2014, Financial Engines provided services directly to plaintiff and other Caterpillar plan participants and was paid directly from participants’ accounts. But the fee for those services was significantly higher than it should have been because the agreement between defendants and Financial Engines required Financial Engines to kick back to defendant Hewitt a significant percentage of the fees charged by Financial Engines, even though Hewitt and its sister company co-defendants did not perform any investment advisory or other material services in exchange for the payment they received.”

According to the complaint, such a payment-sharing arrangement violates federal laws designed to protect retirees.

The text of the suit further suggests changes made to the plan in recent years were not enough to ensure participants were getting a good deal: “In 2014, the business arrangement between defendants and Financial Engines was restructured and re-branded so that defendant Aon Hewitt Financial Advisors, ostensibly providing the investment advice services to plaintiff and other Caterpillar plan participants, directly charged to participants’ accounts the fees for those services. But the re-branding of those services was cosmetic only, and, through a sub-advisory agreement between [Aon Hewitt Financial Advisors] and Financial Engines, all of the investment advice services provided to plaintiff and other Caterpillar plan participants continued to be provided by Financial Engines … Importantly, the financial arrangement between defendants and Financial Engines did not change.”

Plaintiffs boldly go on to state that even after the change, Aon Hewitt knowingly charge the “same excessive fee that had previously been charged by Financial Engines, kept the same amount that had previously been kicked back to defendants by Financial Engines, and paid the balance of the fee to Financial Engines … From all that appears, the principal, if not the only, reason for the re-branding of the service was to conceal the illegal kick-back.”

NEXT: More context from the suit 

A short fee schedule included in the text of the complaint shows the fees charged by Financial Engines under the initial arrangement went as follows: An account balance up to $100,000 brought a 0.40% of assets fee; a balance of $100,000.01 to $250,000.00 brought a 0.30% of assets fee; and $250,000.01 or more would see an annual fee of 0.20% of assets.

“At no time during the period when Financial Engines was providing investment advice directly to Caterpillar plan participants did Hewitt directly notify Ms. Scott or other similarly-situated plan participants that Hewitt was taking a 20% to 25% kickback on the amounts paid to Financial Engines for ‘managed services.’ Yet, the required Annual Report of Employee Benefit Plan filing that the Caterpillar plan submitted to the United States Department of Labor for 2013 clearly shows that Hewitt was receiving 25% of the advice fee paid and 20% to 25% of the managed account fee paid to financial engines,” the complaint states. 

“On information and belief, the Hewitt defendants recognized that this kickback information was at-risk of being discovered through the required public disclosures that were increasingly becoming available in on-line repositories, as opposed to paper filings that were historically difficult to access,” plaintiffs claim. This risk was, they suggest, what drove the aforementioned “cosmetic changes” made to the advisory arrangement.

Plaintiffs suggest that, beginning in 2014, the Hewitt defendants and Financial Engines “changed the structure of their arrangement to hide from public scrutiny the kickback fees that Hewitt was receiving from Financial Engines … In or around that time, although it was Financial Engines that continued to perform the advisory services to Ms. Scott and similarly-situated participants in the plans, including the Caterpillar Plan, Hewitt’s newly incorporated sister company, Aon Hewitt Financial Advisers [AFA], purportedly became the entity that would provide the plans with advisory services. Yet, in reality—and for all intents and purposes—Financial Engines continued to do all the actual work related to the investment advisory services that Ms. Scott and similarly-situated participants in the plans were receiving.”

The claim is based on language taken from plan disclosures, which reads, “AFA has hired Financial Engines Advisors LLC to provide sub-advisory services. We rely exclusively on the proprietary software systems and methodology developed and maintained by Financial Engines Advisors LLC, an SEC-registered investment advisor, which is unaffiliated with AFA or any of our affiliated companies, to create target allocations for participants.”

“By having the Plans’ sponsors hire AFA in lieu of Financial Engines, and then having AFA enter into a sub-advisory agreement with Financial Engines, whereby Financial Engines performed all the relevant work for Ms. Scott and the similarly-situated plan participants, the Hewitt defendants were no longer required to report the fees they received from Financial Engines,” the complaint concludes. “Instead, AFA simply skimmed 20% to 25% off that fee for the Hewitt defendants and paid the balance to Financial Engines as a sub-advisory fee.”

Asked for comment, Aon Hewitt promptly replied that it has a policy not to discuss ongoing litigation: “We have an unwavering commitment to fee transparency and independent and unbiased retirement and financial wellness solutions. Our model has always been and will continue to be fully transparent about all sources of revenue and fees we receive, so that plan sponsors and plan participants fully understand the cost of their plans.”

The full text of the compliant is here. 

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