By Mark Miller
CHICAGO Dec 17 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
"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
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."