By Colin Pierce, Managing Director, Head of Healthcare Practice
As financial pressures mount for the health care industry amidst COVID-19, business and benefits leaders are understandably looking for ways to maximize the value of the benefits they provide to employees while being mindful of managing costs. An estimated 28% of U.S. hospitals are losing money amid growing declines in admissions and patient visits due to rising Covid-19 infection rates, according to the Strata Decision Technology. This number is expected to rise as the industry continues to face overcrowding, non-critical procedure cancellations and employee furloughs.
The financial implications of this crisis on health care employees — from cafeteria staff to doctors — are already vast. In an October 2020 TIAA Institute survey of health care employees on financial wellness and retirement readiness views, 71% rated “not outliving financial assets” as high financial priority for their retirement. (Yet, before the pandemic, only 27% of workers were highly confident they would not run out of money in retirement.)
In that same TIAA Institute survey, only 14% of savers reported being “very confident” in choosing the best way to draw income from their savings during retirement.
Findings from a survey focused on Americans’ financial resiliency shows saving for retirement was one of the goals most negatively impacted by COVID-19; just four in 10 respondents who were saving report that they are on still track.
Health system management will need to consider how they can help employees continue to save for retirement as part of their ongoing recovery strategies.
A sometimes overlooked, yet effective, strategy that allows employers to offer their employees benefits while managing costs is to meaningfully structure their retirement plan design to be focused on providing retirement income by embedding lifetime income options like annuities.
Including fixed annuity options that offer guaranteed income for life or embedding annuities as part of a custom default solution in a retirement plan can function for future retirees the way defined benefits (DB) plans used to. Commonly called pension plans, DBs were popular in the mid-1980s and ‘90s, but were considered by many employers to be costly, were often underfunded, and increased already-sky-high liabilities. To trim margins, many employers transitioned from DB plans to defined-contribution (DC) plans with target-date funds now as the plan investment default option, shifting the burden of saving for retirement to their employees.
What was overlooked in this transition was the long-held expectation by employees that their retirement plan would lead to lifetime income in retirement, something that pensions provided, but many DC and target-date plans do not. Further, those who lack financial confidence or the time—like many health care employees who are focused on caring for COVID-19 patients—to manage their retirement savings may be defaulted into their DC plans’ default options through automatic enrollment or re-enrollment features. However, many of these offerings don’t deliver the guaranteed retirement income they’re looking for. Embedding fixed annuities into retirement plan structures, with a specific focus on the custom qualified default, allow employees to take advantage of pension-like benefits and ensure they have guaranteed income for life.
Employers choosing to embed guaranteed lifetime income options into their retirement plans will likely become a key theme in 2021. Congress is already discussing another round of retirement savings legislation designed to improve and modernize the retirement system following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. And according to another study conducted by TIAA, interest in guaranteed lifetime income is on the rise among both employees and employers as both cohorts see the value of these products in helping save for retirement.
Not only do embedded annuities help prepare employees for retirement—both during the savings and decumulation phases—and reduce their financial stress, they can also streamline employer costs, offering employees the benefits of a traditional pension plan without the employer taking on added liabilities. In fact, according to Health Leaders Media, Health care liabilities are projected to rise, culminating in an estimated shortfall of $645 billion. Further, when health professionals are needed most—and as high turnover costs are top-of-mind for employers—embedding annuities that provide employees with retirement security can serve as a differentiating value proposition that can help attract and retain employees.
Despite the significant financial challenges that lie ahead, health care employers will need to find ways to take care of employees’ financial wellness—both in the short and long-term. Revisiting retirement plan design and embedding lifetime income solutions can allow employers to balance cost-cutting measures like reductions to employee benefits while continuing to help their employees continue to save for retirement.