What retirement plan trends are evident in the healthcare industry? This is the question explored by Transamerica in their recently released study “The Path to Wealth Starts with Health: 2017 Retirement Plan Trends in Today’s Healthcare Market”. As healthcare organizations move away from offering defined benefit plans and seek to find retirement benefits to offer to employees, certain trends emerge. Let’s look at some of the trends that came out in the Transamerica survey.
Healthcare Organizations are Concerned with the Basics
While many plan advisors would point towards participants’ retirement readiness as the best indicator of plan success, 49% of healthcare organizations feel that the participation rate is the most important indicator of plan success. While improving participation rates is great goal, if the deferrals rates are not adequate or if the participants are otherwise not on track for retirement then this metric is less than helpful. Advisors to healthcare organizations may do well to encourage using the best metrics when evaluating plan success.
When asked about the biggest challenge to managing the retirement plan, 77% of healthcare organizations cited motivating participants to save adequately as their biggest challenge. This should come as no surprise as it is a commonly cited challenge of plan sponsors across the board.
Participants at healthcare organizations face some of the same hurdles to adequate retirement savings as those in other industries, with lack of financial literacy (63%), lower incomes (62%), and expenses and debt (62%) being the greatest impediments to retirement savings.
Plans are Changing
The survey revealed the extent of the flux in types of plans offered. One of the biggest changes is the rise of the 401(k). While the 403(b) is still the most commonly offered defined contribution plan (72%), the 401(k) is catching up (49%). This is an increase of 11% from 2015 when only 38% of healthcare organizations offered a 401(k). Of the principal plan types, only the 401(k) saw any growth in the number of organizations offering it. Organizations offering a 403(b) dropped from 88% in 2015 to 72% in 2016 and those offering a 457(b) dropped from 72% in 2015 to 52% in 2016.
Of those 403(b) plans being offered, there was an increase in plans that fall under ERISA, 76% in 2015 rising to 82% in 2016.
Employer Contributions are Impacted by Economic Pressure
While nearly all the organizations surveyed contributed to the retirement plan, those contributions are changing. An employer match is still the most common form of employer contribution with 76% offering participants an employer match, followed by 43% who offer a percent of salary as the employer contribution. However, economic pressures in the healthcare industry have affected employer matching rates. While in 2015, 51% of organizations matched $0.50 to the dollar, that number fell to 40% in 2016 and corresponded to a jump in employers matching $0.25 to the dollar (7% in 2015 versus 16% in 2016). Strangely enough, those employers also matching dollar for dollar has also increased from 35% in 2015 to 43% in 2016.
Most of the employers are matching only up to 3 or 4% of participant contributions (21% and 33% respectively) however there was a big jump in employers matching up to 5% increasing from 12% in 2015 to 19% in 2016 suggesting that more employers may be employing stretch matching strategies.
For those healthcare organizations who contribute a percent of salary, 4% is the most common contributed percentage (27%) followed by 3% (22%) and 5% (16%).
Use of Auto Features and Default Contributions is in Flux
There has been much research and press coverage around automatic plan features such as auto-enrollment and auto-escalation. Healthcare organizations are among those plan sponsors using such features. The use of auto-enrollment continues to increase with 55% of healthcare organizations now using auto-enrollment. Conversely, use of auto-escalation has actually decreased, dropping from 47% in 2015 to 40% in 2016. One possible explanation for this decrease might be found in responses to another survey question. When asked about the motivating factors for selecting default contribution rates, commonly cited factors included concerns about participants having adequate take-home pay and the need to guard the budgeted employer contribution amount.
Speaking of default contribution percentages, healthcare organizations are enrolling participants at lower contribution levels. There was a 9% increase in those organizations using a default contribution percentage of 3% or less, increasing from 62% in 2015 to 71% in 2016.
Number of Defined Benefits Plans is Decreasing
It should come as a surprise to no-one that the number of defined benefit plans being offered by healthcare organizations is in decline. Only 27% of healthcare organizations offer a pension plan and, of those, 38% have frozen the plan for all employees. The funding levels for defined benefit plans in this sector appear to be in better shape than many government defined benefit plans. Of the plans in the sector, 58% of them were more than 90% funded. In fact, only 10% of the plans were funded below 70%. Despite this, most plans are concerned about the impact that defined benefit plans will have on their organization in the future citing concerns such as the plan’s impact on organizational financial statements, financial strength of the plan, and investor concern about the plan.
Many industries are changing to adapt to the new retirement landscape. From defined benefit plans to 403(b) plans and now to 401(k) plans, the healthcare industry is an industry in transition when it comes to employer sponsored retirement plans. This suggests a great opportunity for advisors, particularly those who with a broad knowledge of and experience working with different plan types. Advisors able to communicate the value of focusing on participant retirement readiness will be able to have the greatest impact on the success of the plan and on the retirement outlook of individual participants.
The Retirement Analysis Kit has solutions to help you engage healthcare organization plan participants. Whether working with a 403(b) or 401(k), TRAK’s participant reports engage the participants where they are with information that motivates them to take action. Find out more about our participant solutions!