DC Plan Participation Rate in Healthcare Industry Reaches New High
HARRISON, NY, September 24, 2012 -- According to the tenth annual survey of healthcare plan sponsors released today by Diversified, a leading retirement plan provider, and the American Hospital Association (AHA), a record number of healthcare organizations are offering defined contribution (DC) plans with enhancements that include automatic enrollment and automatic deferral escalation to accomplish their most important goal: to help employees accumulate income for retirement.
Furthermore, the percentage of healthcare organizations offering a matching contribution in their DC plan has nearly doubled in six years – from 44% in 2006 to 79% in 2012.
As a result, 73% of healthcare sector employees now participate in a 403(b) defined contribution plan - up from the ten-year low of 58% in 2006 to the highest level of plan participation in ten years.
The survey of 180 healthcare sector plan sponsors, titled Retirement Plan Trends in Today's Healthcare Market – 2012, was conducted by Diversified and the AHA to provide healthcare plan sponsors and their advisors with comprehensive benchmarking information for the strategic evaluation of their retirement programs.
Participation Up, Contribution Level Flat and Low
According to the survey, while healthcare organizations are increasingly doing their part to encourage employees to prepare for retirement, employee DC plan contribution levels have been static – and low – for ten years. More specifically, participants have contributed an average of just 5% - 7% of salary to their defined contribution plan annually for the past ten years.
However, though annual contribution amounts plummeted as investment markets became more tumultuous, contributions are strengthening: the average annual contribution amount fell from a six-year high of $5,205 in 2006 to a low of $3,505 in 2009, but has improved to $4,005 in 2012.
"The good news is that in the healthcare sector, more organizations are embracing all available benefits to help employees improve their retirement readiness," said Brodie Wood, vice president and not-for-profit practice leader at Diversified. "However, participants have to do their part. It's critical that they try to save at least ten percent – and the later they start saving, the more they will need to save to cover their basic retirement costs. Hopefully, as more plan sponsors like those in our study make retirement saving a higher priority, more participants will heed the call."
Use of Automatic Enrollment and Deferral Escalation Rises but Default Rates Still Low, Hardship Withdrawals High
More than one-third (38%) of healthcare plan sponsors are taking advantage of automatic enrollment in 2012 – up from 24% in 2006. At the same time, use of automatic deferral escalation significantly increased to 24% in 2012, up from only 9% in 2006. Both of these are record levels of usage since the questions were first asked in 2006.
However, the default deferral level with automatic enrollment is still low—typically 3% or less according to 70% of the plan sponsors; and, fully 84% said they know their default contribution rate is not high enough.
Does auto enrollment work to increase participation? Absolutely: According to healthcare plan sponsors, the median plan participation rate for those with auto enrollment is 81% versus 64% for those without auto enrollment. The good news is that the "opt out" rate after auto enrollment is just 7% in 2012, down from 8% in 2011.
Offering investment advice is also becoming more widespread: While 48% of plans offered it in 2006, 67% of plans offer it in 2012.
Unfortunately, the tough economy has led to an increase in both loans and hardship withdrawals: 56% of plan sponsors that offer hardship withdrawals said they have seen an increase in activity, up from 47% in 2011. The average hardship withdrawal amount is approximately $2,200. Further, one-in-ten participants (10%) currently have an outstanding loan from their defined contribution plan with a median balance of $4,900.
Measure of Success Shifting Toward Improving Retirement Readiness
Healthcare plan sponsors admit their number one challenge is to motivate employees to save adequately (80%). As a result, their measure for plan success is shifting: They said success is less about participation rate (down from 61% in 2011 to 56% in 2012 as "best indicator of plan success") and increasingly about "income replacement ratio," "amount saved by employee" and "deferral rate," all of which, though small in percentage (6%, 7% and 7% respectively), have at least doubled in importance since 2011. Together they represent a positive indicator that employers are placing greater emphasis on plan participant outcomes.
"Plan participation rate is an important indicator of success," Wood noted. "But employers are also recognizing that participation rates only paint part of the picture. The most important measure of success is whether participants are saving enough to retire with security. Judging by this study, plan sponsors in the healthcare sector are taking great measures to encourage full participation while increasingly trying to embrace methods that drive higher savings rates. Their commitment needs to be met with an equal commitment from plan participants to save more in order to assure success."
Another positive sign of employers working to help employees save is the prevalence of on-site retirement plan representatives, which is also increasing – 46% of plan sponsors have either full- or part-time plan representatives on site, up from 39% in 2011.
Use of Advisors on the Upswing
In one year, the percentage of healthcare plan sponsors that said they use an advisor jumped to 85% in 2012, up from 79% in 2011. According to plan sponsors, the top responsibilities of their advisors are "ongoing investment monitoring" (74%), "investment selection" (70%), and "development of investments policy statement" (54%). Only 42% said their advisor's responsibilities included "act as the plan fiduciary."
Then & Now
Other highlights from the survey include:
- Defined benefit plans continue to be offered by 42% of plan sponsors; but many said their plans are frozen to either new employees (51%) or all employees (49%).
- The number of healthcare organizations imposing a minimum age requirement for plan entry has increased over the past ten years to 75% in 2012 from 64% in 2003.
- Healthcare plan sponsors are more likely to impose a service requirement for plan entry as compared to ten years ago – 53% said they did so in 2003, 65% in 2012. However, the service requirements are becoming less stringent: Only 18% allowed entry at less than one year in 2003, but today, fully 55% allow entry to employees with less than a year of service.
About the Study
The Retirement Plan Trends in Today's Healthcare Market – 2012 survey was conducted via email by Diversified and the AHA to focus on healthcare organizations' defined contribution and defined benefit retirement plan characteristics. A total of 180 healthcare plan sponsors nationwide responded to the survey conducted during the second quarter in 2012. To request a copy of the survey report, please send an email to RetirementResearchCouncil@divinvest.com.
About the American Hospital Association
The American Hospital Association (AHA) is a not-for-profit association of healthcare providers and individuals who are committed to health improvement in their communities. The AHA is a national advocate for its members, which include more than 5,000 hospitals, health systems and other healthcare organizations, and 42,000 individual members. Founded in 1898, the AHA provides education for healthcare leaders and is a source of information on healthcare issues and trends. For more information, visit www.aha.org.
Diversified is a leading provider of customized retirement plan administration, participant communication and open architecture investment solutions for mid- to large-sized organizations. The company's expertise covers the entire spectrum of defined benefit and defined contribution plans, including: 401(k) and 403(b) (Traditional and Roth); 457; non-qualified deferred compensation; profit sharing; money purchase; cash balance and Taft-Hartley plans; and rollover and Roth IRA. Diversified helps more than two million participants save and invest wisely for and throughout retirement.
Headquartered in Harrison, NY, the company's regional offices are located in Arkansas, California, Florida, Illinois, Iowa, Louisiana, Maryland, Massachusetts, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia, and Wisconsin. To learn more, visit www.divinvest.com. Connect with us on Facebook www.facebook.com/DiversifiedRetireOnTrack, Twitter www.twitter.com/GetDiversified, YouTube http://www.youtube.com/user/GetDiversified and LinkedIn http://www.linkedin.com/company/diversified.
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