Thursday, June 29, 2017

Using Retirement Benefits to Solve the Challenge of Hospital Sector Employment

One of my colleagues sent me an interesting article last night. It reminded me that hospitals, perhaps more than any other classification of employer in the US have particularly interesting challenges when it comes to attracting and retaining their employees, mostly professionals. And, as hospital organizations have become a primary employer of physicians, the difficulties only increase.

Let's consider the employee population of a hospital or hospital system. We can start with physicians. From a retirement compliance standpoint, they are probably all highly compensated employees (HCEs) meaning that their compensation, roughly speaking, exceeds $120,000 per year. But, not all physicians are paid the same. The general practitioners and internists, for the most part, are among the lowest paid of the group. At the other end, surgeons, cardiologists, anesthesiologists, and a group often referred to as critical care physicians are among the higher paid. Despite their pay, supply of these specialists may be less than demand. In order for a particular hospital system to meet their own demand, they need something that appeals to those physicians.

Let's turn our focus to nurses. They're often thought of as the life-blood of the hospital. They are skilled professionals, not all that highly paid, and they have a high turnover rate due to burnout. Informal survey data shows that retention of nurses is often due to one of several factors including a great work environment and great benefits.

Then there are the technicians. To someone just collecting data, they may look a lot like nurses. But digging deeper shows that they are not. They have different skill sets and different mindsets. Their pay may be similar to that of nurses, but their jobs would appear to have different stress levels. As a result, their turnover rates due to burnout seem to be lower.

And, there are the true blue collar staff in the hospitals. While they may have learned specific skills and duties that make them more valuable to hospitals than they are in other industries, in many cases, they can find other employment outside of the hospital industry. These people are generally among the lower paid in the systems and probably value straight pay and their health benefits as much as anything.

Finally, we'd be remiss in not mentioning all the other staff from the people who run the hospital systems -- the top executives -- to the administrative staff. All have usually developed specific skill sets that make them particularly valuable in a hospital system where they might not be in other industries. They tend to want to stay with a good organization, but they expect a lot before they would call that organization good.

Moreso than many other industries, what we've pointed out here is that this is a really diverse population. As a group, they are intelligent and well-educated. As a group, they have high-stress jobs. That combination leads to a need for retirement benefits.

But, how do we provide them? The top executives want to be treated as top executives. The physicians have large tax burdens and providing for their heirs that they worry about. The nurses may have relatively shorter careers and, according to data, do not always make saving for retirement a top priority early in their careers.

The current method of choice is to use a deferral sort of arrangement perhaps with a match. So, that would be a 401(k) plan or a 403(b) for some tax-exempt hospitals. There are problems galore there. The physicians complain because they just can't defer that much (maybe even less if nondiscrimination testing is a problem). The nurses who don't focus on retirement suddenly see that between their high-stress, high-turnover jobs and their neglect of their retirement plans early in their careers that retirement may never be an option. Behaviors will likely vary among the other staff.

We need other methods. Those other methods are there.

Suppose we tell the doctors that they can defer more -- a lot more. Suppose we tell the nurses and the technicians that they will still have an opportunity to defer, but that we are going to give them something akin to their matching contribution even if they forget to pay attention to retirement. Suppose we tell the executives that all that nonqualified money that's not secure and not tax-effective can be.

We might have people dying [yes, a very bad pun] to work for our system. When you become the employer of choice, work shortages are less of an issue for you, unwanted turnover is less of an issue for you, and yes, patient satisfaction and therefore profitability will improve.

You need a solution that meets all of these criteria:

  • Costs are stable
  • Ability for very high-paid people to defer significantly is there
  • Nondiscrimination testing is easy to pass
  • Benefits are portable
  • Both lump sums and wholesale priced annuities (annuities from the plan as compared to from a mutual fund provider or insurer) are available
The solution lies in designs like these. Costs can be controlled through proper design. Physicians wanting larger deferrals will happily pay for their own enhancements. Because these plans test so well, nonqualified money can often be qualified. Benefits will be portable for everyone and annuities will be available without lining the pockets of insurers for any participants who want them.

it really should be the best of all worlds for hospital systems.

Friday, June 23, 2017

Fact or Fiction in the Retirement Wellness Media

Sometimes you just have to wonder. Well, maybe you don't have to wonder, but I can speak for myself -- I certainly do have to wonder. The data that I read about simply cannot coexist. We cannot have record numbers of people deferring to 401(k) plans at record rates and yet still have almost universally low-five figure account balances, on average. At least we cannot unless we also have record amounts of leakage via plan loans, withdrawals, and both deferral and work stoppages.

I'm not going to cite a bunch of data here because I don't have it at my fingertips. I'm on the road and it's 5:30 AM, so think of this as your favorite (or not favorite) blogger ranting. I'm allowed, or at least I'm pretty sure I'm allowed.

Once upon a time (no, this is not the start of a fairy tale or one of Aesop's fables), American workers almost uniformly looked forward to the day when they could retire. They did that, in large part, on the backs of their corporate-sponsored defined benefit plans.

As we knew back then, defined benefit plans had many things about them that worked well toward this goal including (but definitely not limited to):

  • Ability to generate lifetime income
  • Lifetime income that could be compared to retirement expenses to understand what other resources might be needed
  • Workforce management ability for plan sponsors using tools like retirement subsidies and early retirement windows
Since then, we've seen changes ... many changes. Initially, they were design and structure changes. With the growth of 401(k) plans and Congress' constant tinkering with defined benefit plans in a supposed effort to save them, there was first a move toward what we now know as hybrid plans (largely cash balance) and then toward freezing and sometimes terminating those defined benefit plans. Thinking back, the most common complaint I heard from corporate finance executives was the financial accounting volatility. Later on, funding volatility became perhaps a bigger issue.

I'll come back to this part of my rant later, but first it's time to return to my original topic.

According to an article that I read yesterday, 74% of respondents to a question said that lifetime income is important, but only 25% thought they had a way to generate it. So, in a tribute to the recently departed Adam West (the "real" Batman), riddle me this fine readers: "How does this comport with all the other articles telling me how well the 401(k) system is working?" Clearly something must be rotten in the state of Gotham.

We can do all of the modeling that we want and honestly, that modeling is in fact valid if, and that's a big if, participants can follow those models for their entire careers.If a person starts deferring at a reasonable level to their 401(k) when they are, say, 25 years old and continue to defer until some reasonable retirement age, all the while getting reasonable returns, that person will be able to retire and likely not outlive their resources.

They can do that, however, if they can use those balances to generate a steady stream of lifetime income. 

But, having reached the holy grail of retirement, these same people now want to do all the things they dreamed of while working. They wanted to retire to the beach or the mountains. They want to travel the world. They want to spoil their grandchildren. 

There is a problem with all of that. Those expenses are pretty front-loaded. That is, they are going to be very expensive in the first years of retirement. That will in turn deplete account balances that can be used to generate lifetime income. In other words, lifetime income may not be what you thought it was going to be. Or, said differently, the retirement wellness data must have a lot of fiction in it.

Once upon a time, that focus was on defined benefit plans. They focused on the employee who typically retired from a company in their 50s or 60s having worked for that company for 30 years or so. We all know that the current workforce doesn't tend to work 30 years for the same company, so that plan may be wrong.

But a defined benefit plan can still be right. Let it take a different form. Defined benefit plans have evolved to the point where they can look and feel like defined contribution plans, but critically still operate as defined benefit plans.

Why is this so critical? If the large majority of people think lifetime income is important, then we need plans that promote it. Yes, those people can get lifetime income from their 401(k), but if they are doing it through a commercial annuity, they have to purchase that annuity at "retail" rates. On the other hand, if they have a defined benefit plan, they can get better lifetime income from the same amount of money because they are getting the annuity at wholesale rates.

Now, there's a way to generate retirement wellness.

Holy Happiness, Batman.