COLUMN-Why your health insurance may soon resemble your 401(k)
By Mark Miller
CHICAGO Dec 17 (Reuters) - Are you ready for the 401(k)-ization of health insurance?
If not, get ready, because there's a good chance it's coming to your workplace soon. That was the consensus of some of the nation's top employee benefits experts, who gathered last week for a conference in the nation's capital.
What we're talking about here is a shift in workplace health insurance akin to the dramatic shift in recent decades from traditional pensions to 401(k)s. Health insurance will move in the same direction in the next five years, according to experts at the annual policy forum sponsored by the Employee Benefit Research Institute (EBRI).
In pension systems, employers promise a specific, defined benefit in retirement; in a 401(k), the employer makes a specific contribution, but workers bear responsibility for making their own contributions and managing investments - and there is no guaranteed benefit in retirement. Employers like defined-contribution systems because they reduce their exposure to risk and volatility. In the case of 401(k)s, risk and volatility are shifted to the employee - and defined-benefit health insurance won't be much different.
EBRI is a respected non-partisan research group focused mainly on retirement and health benefits. It's funded by employers, financial services companies, pension funds, government and other organizations, and the forum attracted top-notch experts from all those areas.
While the experts agreed that defined-contribution health insurance systems are coming, many speakers conceded that the defined-contribution retirement system produces worrisome mixed outcomes when it comes to retirement security. A key problem, they said, is that many employees have a hard time managing 401(k)s.
"We find participants frequently do the wrong thing in terms of market timing," said Tom Woodruff, director of healthcare policy and benefits administration for the State of Connecticut. "They wait until the market goes down 20 percent and then move over to safe investments; then they wait until the market goes up another 20 percent and then start moving back to equities. That puts a lot of people at risk."
A half dozen other speakers offered variations of Woodruff's comment about defined-contribution retirement plans. Larry Zimpleman, chief executive offer of Principal Financial Group, was typical. "We've moved from a mandatory to a voluntary platform - and one of the reasons is that employees like choice in their benefit programs," he said. "The problem is, if left to their own decision making, they don't make the right choices. People are making really bad choices."
EBRI data presented at the conference confirmed that the system is producing spotty outcomes.
Jack VanDerhei, EBRI's research director, showed a slide projecting how today's young workers (age 25-29) will fare in retirement with 401(k)s and Social Security. For plans with voluntary enrollment, 59 percent of the highest-income workers are on track to replace 80 percent of pre-retirement income if they retire at 65, which is the usual industry benchmark definition of success. The lowest-income workers would replace a higher percentage - 67 percent - because they will rely more heavily on Social Security for retirement income.
But the projections assume that all these workers will have 30 years of eligibility to participate in a 401(k) plan over the course of their careers. EBRI projects that will be true for more than 70 percent of the highest-income workers, and about two-thirds of middle-income workers - but only 55 percent of low-income workers. The projection also assumes that all the workers convert their 401(k) nest eggs into inflation-adjusted income annuities at retirement, which is rare.
VanDerhei also ran a what-if scenario on how those outcomes would be affected if Social Security benefits were to be cut 24 percent in 2033, which is forecast to occur unless Congress makes changes to the program's finances. That forecast doesn't look good at all: If that were to happen, just 50 percent of high- and low-income workers would be able to replace 80 percent of pre-retirement income.
How about healthcare? Only 26 percent of large employers are very confident that they'll offer healthcare benefits 10 years from now, according to an annual survey by Towers Watson and the National Business Group on Health.
Zimpleman thinks rising healthcare costs will push half of employers to adopt defined-contribution health insurance plans within three to five years. Under that scenario, employees would receive a specific amount that can be used to shop in a health insurance exchange. In the early going, employers are contracting with large benefit consulting firms to provide private exchanges with pre-selected insurance choices, and wrap-around assistance services to help workers pick plans.
Walgreen Co made news earlier this year when it announced plans to move about 160,000 of its employees to a private exchange plan, and IBM and Time Warner Inc are moving retirees into private exchanges.
Over time, employers may migrate to the public health insurance marketplaces launched under the Affordable Care Act. Currently, the ACA prohibits employers with more than 100 workers from using the exchanges, but in 2017 states can choose to allow big employers to use them. Small businesses, which often struggle to find affordable insurance, may already be heading there, since companies with fewer than 50 workers are exempted from the requirement to offer group insurance to workers.
401(k)-style health insurance will cap employers' exposure to rising costs - but not their employees'.
"Employers will give you a sum with a certain value to go buy something," said Neil Howe, an author and expert on demographic trends and aging. "It will be a lump sum, and God knows what it will cover."
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