Retirement plan design trends in the health care sector
Voya Financial®, in collaboration with the American Society for Health Care Human Resources Administration (ASHHRA) of the American Hospital Association (AHA), recently conducted its first annual survey on retirement plans in the health care sector. The 2019 Voya health care report highlights emerging trends impacting retirement plans for health care providers.
The growing importance of financial wellness initiatives in the health care sector was one of the key takeaways from the survey. Health care workers have the same financial wellness needs as employees across the broader corporate workforce, and many health care plan sponsors feel their workers could be more retirement ready. Sponsors want their service providers to drive financial wellness initiatives through plan design.
Plan design drives plan health
Today, participation and deferral rates in the health care sector are nearly in line with those in the corporate sector.
The report found that health care plan metrics now align closely with corporate plans. To compete with corporations for skilled workers, health care plans must be designed to make saving for retirement easier and more effective for all employees. Plan design features such as auto enrollment, default elections, auto escalation and re-enrollment are being employed to lift performance metrics for both participants and employers.
For example, a primary performance metric is plan participation. Participation in the health care sector is less of an issue today than it was 20 or 30 years ago, when participation hovered in the 30% range. Today, the average participation rate among non-highly compensated employees (NHCEs) is 67%. That’s close to the average in other sectors.
There’s even better news when it comes to deferral rates. The average deferral rate for health care NHCEs is 8%, which is quite a good benchmark and actually higher than the 6.8% average deferral rate in corporate 401(k) plans.*
Key health care industry plan design best practices that drive better participant outcomes
1. Automatic enrollment
Automatic enrollment may not be a fit for every organization, but it is considered a best practice to increase overall plan participation and assist with closing employees’ retirement gap.
2. Automatic deferral rate escalation
This feature allows participants to set a deferral increase automatically at a future date. Can increase average contribution rates for participants while combatting participant inertia.
3. “Stretch the match”
Stretching the match is a practice in which an employer sets a higher participant contribution threshold in the plan in order for participants to qualify for a matching contribution. The idea is that employees will be inclined to save at the higher level in order to get the full match.
4. Annual re-enrollment
Restarts those participants who took a break and may have forgotten to restart their contributions. Reminds employees to take an active role in their retirement, can help participants be better invested, and boosts overall plan health.
But that generous deferral rate may be a little deceiving. Many health care employees have not been making those higher contributions over their entire career which could explain why some are behind in their retirement readiness. Financial experts suggest participants aim for savings rates of 10%-15%, so current sponsor priorities are focused on motivating participants to save more, along with increasing plan participation and helping employees with holistic financial wellness.
Increasing savings using behavioral finance science
Lessons from behavioral finance research can help with these efforts by providing incentives to encourage “healthier” financial decision making. An effective way to overcome the inertia so common among workers is to automate much of the retirement savings process.
You can’t save more (or at all!) if you don’t participate in the plan. Auto enrollment gets employees started. Once enrolled, higher default deferral rates and default investment elections that are more appropriate for long-term retirement investors may help employees get on a faster track to their savings goals. Auto escalation formulas then keep the savings momentum going, again, overcoming the inertia that prevents employees from actively boosting their contributions rates.
While auto solutions are designed to help participants better prepare to reach their retirement savings goals, they often only apply to newly hired employees and may not necessarily impact participants who were in the plan prior to their implementation.
Many health care plan sponsors are considering the benefits of a re-enrollment—where existing plan participant balances are automatically re-enrolled in their plan’s qualified default investment alternative (QDIA), unless otherwise directed by the participant. A re-enrollment strategy can help capture participants who are otherwise unengaged and drive positive participant outcomes.
Increasing savings balances with employer contributions
Employees see employer contributions as a valuable benefit that sets workplace retirement plans apart from other savings vehicles. This is why employer contributions can be an effective recruitment and retention tool. Over three-quarters of health care employers offer a fixed employer contribution in their plan and one-third provide a contribution of 6% of salary, which is a generous amount.
Nearly two-thirds (65%) of health care employers offer a matching contribution, while 27% offer a stated percent of salary. For employers using a matching formula of cents per dollar, 44% provide a match of $0.50 for every dollar the employee contributes and another 36% provide a dollar-for-dollar match.
A dollar-for-dollar match up to 5% of pay is the most popular formula, implemented by 16% of plans with a matching contribution.
Stretch-the-match formulas that encourage employees to increase their deferral rate to maximize employer contributions have become quite popular in the corporate world. An example would be $0.25 on each $1.00 up to 10% of pay.
These formulas haven’t yet taken hold in the health care sector. An argument could be made that with an 8% average deferral rate among NHCEs, stretch-the-match programs may not be as necessary for nudging health care plan participants up to a reasonable deferral rate. But incentive matching programs could be valuable in helping to push deferrals to the next level—perhaps 10% of pay—which is where highly compensated health care employees currently stand, on average.
Improving retirement outcomes for health care workers
The COVID-19 crisis has put extra pressures—professional, emotional and financial—on health care workers. Just as health care retirement plans are reaching parity in many areas with corporate plans, coronavirus-related economic challenges are causing some sponsors to consider suspending important benefits like discretionary employer contributions. Some participants may be thinking of accessing some of the money in their retirement plan account for immediate financial needs, and sponsors may adopt some of the provisions in the CARES Act that relax rules around retirement plan withdrawals and loans. These actions could undermine retirement readiness even further.
But this shouldn’t change the long-term plan design trends that seek to help employees achieve short-term and long-term financial wellness. The Voya health care report offers insights for health care plan sponsors to benchmark their plan practices, review current thinking on behavioral finance and consider how plan design changes coupled with financial wellness programs can help improve retirement outcomes and business metrics such as employee retention, cost of care, quality of care and organizational growth.
Reach out to your Voya representative1 to learn more about how Voya can help drive plan health in your organization.
You can also visit VoyaDifference.com/healthcare to download the entire 2019 Voya health care report and benchmark your plan against the industry.
Products and services offered through the Voya® family of companies.
*Source: PLANSPONSOR 2019 Defined Contribution Survey.
1 Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC).