According to Transamerica Retirement Solutions report, “Retirement Plan Trends in Today’s Healthcare Market – 2014,” produced in partnership with the American Hospital Association, they are making adjustments to plan design that can help employees achieve retirement goals and also implementing programs that address the challenge of employee engagement. Seventy-five percent of sponsors surveyed said motivating employees to save adequately is the biggest challenge of managing a retirement plan.
Plan sponsors in the health care industry still use participation rates as a measure of plan success, but the use of this metric is declining. Retirement readiness measures are gradually supplanting participation rates as reliable indicators of plan performance. Plan sponsors who utilize retirement readiness as an indicator of plan effectiveness increased to 35% in 2014 from 23% in 2012.
Eighty-seven percent of surveyed plan sponsors indicated that their plan’s default deferral rates were not high enough. The number that offer automatic enrollment default deferral rates of 3% or less declined to 48% in 2014 from 70% in 2012, while the rate of those utilizing a default deferral rate of 5% or more nearly quadrupled during the same period.
While nearly four in 10 health care industry defined contribution plans offer 20 or more investments, there is a clear trend toward offering a more streamlined set of investment choices. The percentage of plan sponsors that offer 20 or more investments decreased to 39% in 2014 from 48% in 2012.
Transamerica’s survey also finds plan sponsors are addressing the challenge of employee engagement by implementing programs aimed at educating and informing participants. Because of the diverse needs of their employee populations, these sponsors employ a multichannel approach to communicate with their participants, including on-site representatives, meetings, customized print and electronic campaigns, investment advice and comprehensive financial planning.
“This year’s survey provides valuable insight into the changing landscape of the not-for-profit healthcare retirement plan market,” says Brodie Wood, vice president and national practice leader, not for profit markets. “It shows the unique challenges that healthcare retirement plan sponsors face and reveals trends that will reshape their retirement plans in the future.
Plan Design Trends
Nearly three-quarters (72%) of defined contribution plan sponsors in the health care industry offer a 403(b) plan in 2014, consistent with 2012. Of these 403(b) plans, nearly three-quarters (74%) are Employee Retirement Income Security Act (ERISA) plans. Twenty-one percent offer a Roth 403(b) plan. Forty percent of plan sponsors in the health care industry offer a 401(k) plan, with another 13% offering a Roth 401(k) plan.
A significant majority (89%) of plan sponsors in the survey utilize a single-vendor arrangement. When a multiple-vendor arrangement is used, the average number of vendors is two.
Ninety-four percent of all defined contribution plan sponsors in the health care industry offer some type of employer contribution. Although a fixed contribution is still the most common type of employer contribution (63%), this decreased significantly from 78% in 2012. A discretionary contribution, while less common (32%), increased dramatically from 17% in 2012. Only six percent do not offer an employer contribution at all.
A matching contribution is still the most common type of fixed employer contribution (69%). However, this decreased notably from 79% in 2012. A stated percent of salary, while still less common (41%) than a matching contribution, increased correspondingly (up from 31% in 2012).
The typical employer match formulas show a significant increase in the level of the match provided. The most common formula is $.50 up to 6% of pay (24%, up significantly from 15% in 2012). The next most common formula is $.50 up to 4% of pay (15%), followed by $1.00 up to 3% of pay (13%). The percentage of defined contribution plan sponsors in the health care industry offering a match of $.50 up to 6% or more of pay nearly tripled, to 11% from only 4% in 2012. The increase in level and amount of the employer match—in plans that do offer this type of employer contribution—speaks very well for plan sponsors' efforts to drive participants’ financial preparedness for retirement, Transamerica says.
Nearly four in 10 (39%) defined contribution plans of health care organizations offer more than 20 investment options (down markedly from 48% in 2012). Another 23% offer 16 to 20 investment options, and 29% offer 11 to 15 investment options. Isolating just 403(b) plans for health care organizations, the decrease in plans offering more than 20 funds is even more striking (33% in 2014, down from 49% in 2012).
Forty percent of plans use an automatic enrollment arrangement (up slightly from 38% in 2012), and 22% utilize automatic escalation as well. Within the health care market, 401(k) plans utilize automatic features to a significantly greater degree than 403(b) plans: Automatic enrollment is utilized by 54% of 401(k) plans (versus 35% of 403(b) plans), and automatic escalation is utilized by 29% of 401(k) plans (versus only 21% of 403(b) plans).
When participants are automatically enrolled, they are still most likely to be enrolled at a default deferral rate of 3% or less (48%); however, the percentage of health care industry defined contribution plans utilizing a default deferral rate of 3% or less has declined markedly from 70% in 2012. Correspondingly, utilization of a 4% default deferral rate has increased considerably to 36% in 2014 from 25% in 2012. Utilization of a default deferral rate of 5% or higher has nearly quadrupled, to 15% in 2014 from only 4% in 2012.
Target-date funds are the most popular default investment option, with 81% of plans offering this type of fund for automatically enrolled participants (increased from 58% in 2012). Balanced/asset allocation funds are used by 5% of plans, and custom model portfolios are used by 5%.
Eighty-six percent of health care organizations’ plans include a loan provision (up considerably from 79% in 2012). Twelve percent of participants have an outstanding loan, up from 10% in 2012. The median outstanding loan balance increased as well, to $5,900 in 2014 from $4,900 in 2012.
Nearly all plans in the survey (92%) include a hardship withdrawal provision. As with loans, there has been an increase in the average hardship withdrawal amount, up to $3,100 in 2014 from $2,200 in 2012. Nearly one in three plan sponsors (32%) reported an increase in hardship withdrawal activity in 2014.
The research reveals trends for defined benefit plans offered by health care organizations as well (see “More Health Care Organizations Bundling DB Plan Services”).
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