A Great Niche for 401k Plan Advisors

Health care organizations are moving from 403b to 401k

401k, 403b, retirement, health careA new(er) market is opening up.

‘Niche’ might be overselling it, as it accounts for a seventh of the economy, but it’s definitely an area for 401k advisor specialization, and a surprising one at that.

Transamerica revealed the latest annual survey findings of retirement plan trends for health care institutions. The conclusion?

“A variety of political and economic shifts bring considerable change, challenge, and volatility to health care institutions–including hospitals, group practices, rehabilitation, and care facilities,” it finds. “To attract and retain key talent, health care organizations have been updating their retirement benefits programs to look more like those found in the corporate sector.” [Emphasis hours]

As retirement advisors know, many health care organizations are not-for-profit, and offer 403b plans rather than corporate 401k retirement plans.

However, the survey found that fewer health care organizations sponsor 403b plans and more sponsor 401k plans than in the prior year.

While the number of health care organizations sponsoring 403b plans dropped to 72 percent in 2016 from 88 percent in 2015, the number sponsoring 401k plans rose to 49 percent from 38 percent.

Like 403b plans, traditional defined benefit plans are also becoming more scarce as health care organizations choose to freeze or terminate their current DB plans.

The decline in active defined benefit plans leaves defined contribution plans as the primary vehicle for employees’ retirement savings, and organizations report that motivating employees to save adequately is the greatest challenge for their retirement plan.

Retirement plan participation rates have dropped to the 70 percent level for non-highly compensated employees, but have remained at levels over 95 percent for highly compensated employees.

“Convincing staff to save for retirement is a challenge, and many organizations view the retirement plan’s participation rate as the key indicator of plan success,” Brodie Wood, senior vice president at Transamerica, said in a statement. “A disparity between highly and non-highly compensated employees can limit plan design options for plan sponsors.”

Plan Design Trends

Plan design strategies that incentivize participants to contribute more to their retirement accounts are on the rise.

These include “Stretch the Match” strategies that encourage employees to increase their own contributions in order to receive the employer’s matching contributions. These strategies have proven effective in enhancing employees’ savings rates and increasing employees’ retirement readiness.

Retirement plan experts largely agree that automatic enrollment and automatic deferral increases are the most effective way of putting participants on the road to retirement readiness, especially in industry sectors where participation is chronically low, as is the case in healthcare.

Although many health care organizations (55 percent) have adopted automatic enrollment of employees into the retirement plan, more organizations need to implement automatic contribution increases to better help participants save more for a comfortable retirement. The survey found only 40 percent of healthcare organizations have implemented automatic contribution increases.

Automatic contribution increases can be a critical factor in improving employees’ retirement readiness, because many healthcare organizations (71 percent) set automatic enrollment savings rates at three percent.

Custom asset allocation funds are no longer the prevalent Qualified Default Investment Alternative (QDIA) among health care plans. The most popular QDIA choice is a target-date fund series. Two-thirds of health care organizations choose a target date series of funds as the default election.

Advisory and Plan Management

Four out of five organizations rely on a plan advisor to help with a variety of plan functions.

Health care plans rely on the advisor (most often an investment advisor or a securities broker) to help explain fees, assist with plan design recommendations, support due diligence, make sure the plan is compliant, and improve education and outcomes for participants.

The number of organizations implementing Total Retirement Outsourcing rose 12 percent from 2016 from 2015. Total Retirement Outsourcing moves the retirement plan to a single service provider from multiple providers.

Many health care organizations also require providers to offer on-site staff to provide educational support and help participants with their retirement plan decisions.

About one-third of organizations have a full-time onsite plan representative assigned by the plan’s service provider. This representative helps employees better understand the plan, and can provide general financial guidance.

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