Offering the retirement vehicles is one thing, but getting employees to take advantage of them is another. To accomplish this, hospitals are relaxing age and service requirements, particularly in the not-for-profit exclusive 403(b) plans, which are being participated in by 58% of health-care workers, according to the American Hospital Association (AHA) and Diversified Investment Advisors’ 2003 Retirement Plan Trends in Today’s Healthcare Market survey.
The popularity of the 403(b) plan, offered by 78% of health-care organizations, is rooted in its unique characteristics. These plans – reserved for not-for-profit organizations that many hospitals qualify for – are usually voluntary salary deferral programs, allowing employees to contribute immediately. Even though employer contributions are not mandatory, health-care plan sponsors are now matching employee 403(b) contributions using formulas similar to those used in 401(k) plans.
In fact, across all plan types of retirement plans most plan sponsors (69%) contribute to their retirement plans using a fixed formula, primarily concentrated in organizations with a larger employee base. For those plans that use customized formulas, the study found a wide array in use, including contributions based on facility type, length of service and percentage of salary.
Further, unlike the sponsors of 401(k) plans, sponsors of 403(b) plans find the regulation migraines kept to dull throbs. Not only do these plans not have to pass many of the nondiscrimination tests or file a letter of determination with the IRS that plague 401(k) plans, but the annual Form 5500 filings are also not nearly as complex and, in some cases, not even required.
The 403(b) plan, though, is far from the only option, with the 401(k) being the second most popular participation option - 20% of all employees chipping in to these plans, followed by:
- 19% - 401(a)
- 2% - 457(b)
- 1% - 457(f)
However, the 401(k) plan is rarely the primary defined contribution plan offered in health care organizations and its offering is apparently concentrated in the for-profit sector, even though legislation was passed in 1996 allowing not-for-profit health care institutions to offer these plans. Currently though, there are only 16% of all plans that sponsor this type of plan and, in these cases, the 401(k) option is usually offered through the organizations' for-profit affiliates.
To help promote other options available and retain employees in those crucial early years of service, many plan sponsors offer various vesting options for their 401(k) plans. The majority (45%) rely on a graded vesting schedule - compared to 27% of 403(b) and 35% of 401(a) - followed by 33% using cliff vesting (33% in 403(b); 57% in 401(a)) and only 22% that offer immediate full vesting (40% 403(b); 8% 401(a)).
Additional variety was found among the plans in the number of years offered in a vesting schedule. Within 401(k) plans in the health-care sector, the most popular vesting schedule was five years (31%), followed by one to four years (28%); immediate vesting (22%) and six years (19%). Similarly, 403(b) and 401(a) plans also relied heavily on four-year vesting schedules, 33% and 63% respectively. However, the 403(b) plan was more likely to have an immediate full vesting with 40% of organizations offering this option.
The study found 401(k) plans in the health care market typically offer between six and 20 different investment options. Most plans though fell in the six to 10 range (27%), followed by:
- 24% - more than 20
- 24% - 11 to 15
- 22% - 16 to 20
- 4% - one to five.
The 403(b) situation is an entirely different world, due to the multiple provider situation. In these plans, the vast majority (47%) has more than 20 investment options, followed by:
- 21% - 11 to 15
- 13% - 16 to 20
- 12% - six to 10
- 8% - one to five.
However, more is not necessarily better, as plan sponsors are cutting costs by reducing the number of "extraneous investment choices" available to participants. To accomplish this, many companies are attempting to reduce the number of investment options in 403(b) plans to between 15 and 20, by consolidating these accounts under one vendor. In the past, hospitals had hired five to 10 403(b) providers to service their participants, resulting in dozens of mutual funds being offered.
The study found the target by many 403(b) providers to be between 10 and 20 options, diversified across asset class and styles, including three to five asset allocation funds. In addition to lowering costs, plan sponsors are also seeking to meet their fiduciary responsibilities outlined in the Department of Labor's (DoL) 404(c) regulations.
Asset allocation funds are definitely no stranger to health care retirement plans, currently being offered by 60% of those plans canvassed, compared to being offered by only 30% of plans in other industries. Elsewhere, popularity is growing for real estate funds, currently being offered by one-fourth of not-for-profit hospitals, with 5% likely to add this option in the future. However, the study did caution this trend is likely due to the recent performance of this sector.
Most popular in the health-care group are money market, balanced, equity growth, and international/global funds, which all are being offered by more than 80% of respondents. Comparatively, self-directed brokerage accounts (SDBA) and mutual fund windows are not as popular, with only 15% of plan sponsors making an SDBA an available option.
Like much of the retirement plan sponsor world, retirement administration outsourcing is a major trend in the health care market. The most popular choice for outsourcing among health-care organizations are minimum distributions, currently being outsourced by 62% of respondents with 7% looking to outsource. After this, outsourcing was most common for:
- 57% - loans (9% would like to)
- 51% - hardship withdrawals (12% would like to)
- 46% - Qualified Domestic Relations Orders (10% would like to)
- 26% - paperless enrollment (24% would like to)
- 20% - eligibility determination (6% would like to).
Not surprisingly, given the demands and challenges of managing a larger health care organization, larger plans are more likely to outsource functions such as required minimum distributions and enrollment. Nearly seven out of 10 (69%) plans with greater than 10,000 participants outsource paperless enrollment, compared to only 39% of those plan between 5,000 and 9,999 participants - the next highest percentage. Also heavily concentrated among the large plan group is eligibility determination (41%), compared to next highest percentage in plans between 1,000 and 4,999, only 23%.
Withplan sponsors in the health care industry now increasingly relying on their retirement plan provider to handle activities previously managed internally, providers are also offering a greater range of ancillary services to meet plan sponsor demand. Already, 60% of plan sponsors rely on their provider to make investment advice available to their employees, with 16% of sponsors looking to add this option. Other options being offered:
- 46% - Flexible Spending Accounts (7% would like to)
- 32% - 529 college savings plans (34% would like to)
- 22% - Medical Savings Account (10% would like to)
- 17% - Education IRA (26% would like to)
- 13% - Fee-based financial planning (14% would like to).
The study found a majority (97%) of plan sponsors are making investment advice and guidance available to employees through retirement-plan providers. The most popular commonly turned-to resource was found to be benefits consultants (44%), followed by:
- 25% - benefits broker
- 19% - securities broker-dealer
- 12% - other.
Overall, the 2003 Retirement Plan Trends in Today's Health-care Market was based on responses from 303 health care plan sponsors nationwide in 2002.