Ross Bremen, CFA, Partner
Timothy Fitzgerald, CAIA, Consultant
NEPC Healthcare Team- August 2016
The dust is settling from the latest healthcare merger mania and organizational integration is all the rage. Not surprisingly, healthcare retirement plans are in the middle of it all. If we consider the rapid shift in the primary retirement structure for healthcare employees (Defined Benefit to Defined Contribution) and the myriad types of DC plans offered (403(b), 401(a), 401(k), etc.), the result is a very large DC program rife with complexity.
Trying to govern this new structure can leave healthcare staff and committees feeling as if they’re battling the mythical “hydra” – a large beast, with multiple heads. In fact, the sheer size and complexity of the DC program may feel like it requires a Herculean effort to manage. This paper provides some insight to help Healthcare slay the hydra, so to speak.
This report is based on an NEPC survey of Corporate Plan Sponsors (Corporates) and Healthcare organizations about retirement plan governance challenges. In this paper we tackle the issues that Healthcare organizations and Corporates face and outline organizational concerns and priorities.
Healthcare and Corporate Plans: A Collective Conscious
Several years ago, many Corporate plans began to shift to DC, from DB as the primary retirement vehicle. As such, they’ve had a bit of a head start on addressing the governance challenges associated with the change. Having said this, Healthcare has quickly caught up with them (Exhibit 1).
The survey also pointed to several other areas where Corporates and Healthcare organizations have a collective focus
· Focus on Fees: Ensuring the current recordkeeping pricing model is most appropriate (e.g., bundled, per head fee, basis point, etc.), the benchmarking of fees is always a useful exercise, and NEPC provides an annual fee survey that allows plans to better understand how they rank against a broad universe. The 2016 annual DC fee survey will be available soon. NEPC’s 2015 fee survey is currently available.
· Strained Resources: Time commitment of committee members is viewed as a significant challenge.
· Diversity of Viewpoints: Different views and expertise from committee members is the most important quality when selecting new members.
· Governance Structure: Use of investment and benefits committees are similar, as well as the items for which the committees were responsible for (e.g., investment policy development, manager monitoring, evaluating the record keeper).
Issues Specific to Healthcare - Multiple DC Plans
Healthcare generally has the added challenge of multiple plans under the same DC program; whereas Corporates usually tend to have one plan. Typically upon a merger/acquisition, Corporates tend to quickly consolidate into one plan. However, for numerous reasons, including regulatory considerations, different hospital cultures, qualified/non-qualified plans, among others, Healthcare tends to operate multiple plans in perpetuity. Despite the greater number of disparate plans, the survey shows that staffing levels tend to be the same across Healthcare and Corporates. We found this surprising as Healthcare staff likely needs to spend more of their time on the DC plans than their Corporate counterparts.
Large Committees and Potentially Slower Decision Making
Another striking difference is the committee size – Healthcare has significantly larger committees. This may be due to the multiple plans or the culture of Healthcare. In our experience, Healthcare is more likely to use a consensus-driven decision-making model which can result in better organizational ‘buy in’, but also can extend the decision-making processes. As detailed in Exhibit 3, approximately 50% of the Healthcare respondents indicate they had committees in excess of seven members, whereas Corporates had less than about 20% with seven or more members.
Given the multiple plans and the reasons why so many different plans exist, the larger committee size is understandable. While size may have other benefits, timeliness in decision making is not one of them. This premise seems to be supported when we compare the top challenges for Healthcare and Corporate DC respondents, as outlined in Exhibit 4.
While both Corporates and Healthcare share the same concern of getting sufficient time commitment from the committee, Healthcare’s next largest concern was the timeliness of decision making. It certainly would seem that the larger committee size could be slowing down that process. NEPC believes the committee size may be managed effectively with consistent and transparent Procedure and Governance Documents across plans and this may enable decision making concerns to be more aligned with Corporate peers.
Organizational Concerns and Priorities
When we turn to organizational concerns and priorities, we again start to see the differences between Healthcare and Corporates. Exhibit 5 outlines respondent concerns.
Interestingly, the Healthcare respondents’ top two concerns focus on overall governance of the program. Whereas Corporates tend to look more towards implementing procedures, and ability to make prudent decisions. This would suggest that Healthcare is continuing to work through the establishment of the governance structure and common procedures, whereas Corporates have moved more toward executing upon the established structure. NEPC has worked with many of our Healthcare and Corporate DC clients on (1) identifying and educating on best governance practices, and (2) helping with the implementation once they are established.
Moving on to priorities, “Auto Features” ranks as the top priority for Healthcare, but ranks fifth for Corporates. This suggests another area where Healthcare providers would be able to benefit from the knowledge of how Corporates have implemented auto enrollment. NEPC believes that auto enrollment is a best in-class feature of plans and something that has been recommended to both our Corporate and Healthcare clients for years.
The appropriate governance of a Healthcare DC program continues to be a challenge and is ever evolving — much like the Hydra. In particular, having multiple plans, larger committees, and being largely consensus driven presents multiple hurdles that require Herculean strength to tackle this beast. Notable takeaways are that Healthcare providers are effectively adapting to a fast changing target and managing significantly greater complexity than their Corporate peers. Having said that, there may be some learnings from what many Corporate plans have adopted.
With our depth and experience in the DC space, NEPC would welcome the opportunity to assist the Hercules Healthcare professionals in helping Slay the Hydra.
About the Survey
NEPC surveyed 106 participants — 76 Corporate Plan Sponsors and 31 Healthcare organizations.
NEPC’s Defined Contribution and Healthcare Practice Groups
The Defined Contribution Practice Group serves 144 retainer relationships, representing assets of $167 billion. The Healthcare Practice Group serves 38 relationships, representing assets of $55 billion1. For more information, including detailed survey results, please email Healthcare@NEPC.com or call 617-314-3105.
Disclaimers and Disclosures
- Past performance is no guarantee of future results.
- The information in this report has been obtained from sources NEPC believes to be reliable. While NEPC has exercised reasonable professional care in preparing this report, we cannot guarantee the accuracy of all source information contained within.
- The opinions presented herein represent the good faith views of NEPC as of the date of this report and are subject to change at any time.
1) Assets as of 3/31/16