401(k) Lessons Apply to Health Care Plans

August 12, 2008 (PLANSPONSOR.com) - The path of the 401(k) from being mostly employee-driven to recent efforts to relieve employees of the burden of decisionmaking may well-serve consumer-driven health plans (CDHPs), according to research published by the Employee Benefit Research Institute (EBRI).

Efforts to control health care costs have led employers to shift responsibility to employees for health care decisions, but the same behaviors exhibited by 401(k) participants – inertia, disengagement, and confusion – can now be seen in participants of CDHPs, the study noted. “Lessons From the Evolution of 401(k) Retirement Plans for Increased Consumerism in Health Care: An Application of Behavioral Research” notes that when faced with making complex decisions, individuals often resort to oversimplifying the decision by reducing it to one important factor they can understand – short-term out-of-pocket costs, even when it results in much higher long-term costs.

In addition, the study noted that increased choice caused many workers to be overwhelmed and find it too difficult to make appropriate retirement planning choices, and the same could be true when workers are faced with too many health care choices.

Other lessons from retirement plan participant behavior that may apply to CDHP participant behavior cited by the study include:

  • Education has resulted in little or no improvement in workers’ knowledge of retirement saving and investing. In addition, empirical evidence suggests that even when workers are “educated,” most fail to act on their knowledge. The heavy investment that many employers have made in retirement education and information programs often fails to produce the desired results.
  • Financial incentives, such as an employer match in a 401(k) plan and tax breaks, also fall short of motivating optimal behaviors. Despite the tax-favored status of contributions and the existence of employer matching contributions, a significant portion of eligible workers still do not contribute to 401(k) plans.
  • Many individuals remain disengaged from matters they do not have to address immediately, and when they do act it is often too late.

Study authors Jodi DiCenzo, founder of Behavioral Research Associates, and Paul Fronstin , director of the EBRI health research and education program, suggest that just as default choices, simplification, and requiring active decisions in 401(k) plans can go a long way toward improving the retirement decisions workers make, similar design factors can be applied to employer-sponsored health plans.

The study can be found in the August 2008 EBRI Issue Brief which will be posted online at www.ebri.org on August 12.