Retirement Plan Trends in Today’s Health Care Market: Best Practices in a Changing Landscape

A CBIZ Benefits & Insurance Services Program
Retirement Plan Trends in Today’s Health Care Market:
Best Practices in a Changing Landscape

Mike Kasecamp ‒ CPFA, QKA
CBIZ Retirement Plan Services
Vice President, Retirement Plan Consultant
Retirement Plan Trends in Today's Health Care Market Aug. 16, 20162
Your Presenters
Al Winters ‒ FSA, EA, MAAA
Senior Vice President & Chief Actuary

Points to Cover
Retirement Plan Trends in Today's Health Care Market3
I. Defined Contribution Plans
i. Recent trends in health care
ii. Dynamic plan design considerations to attract top talent
iii. Today’s changing regulatory landscape
iv. Case Study: Novant Health System, the dreaded excessive fee
class action lawsuit
v. The Big Shift: defined benefit to defined contribution
II. Defined Benefit Plans
i. Pension Protection Act lookback
ii. Risks facing DB plans
iii. DB risk management trends

Defined Contribution Plans

• Merger and Acquisition (M&A) activity resulting in retirement
benefits being consolidated
• Continued shift from defined benefit plans to defined
contribution plans
• Consolidating recordkeepers
• Adding Roth features
• Increase focus on retirement committee governance and
process, especially regarding total plan costs and how they are
paid
• Merger and Acquisition (M&A) activity resulting in retirement
benefits being consolidated
• Continued shift from defined benefit plans to defined
contribution plans
• Consolidating recordkeepers
• Adding Roth features
• Increase focus on retirement committee governance and
process, especially regarding total plan costs and how they are
paid
Recent Trends in Health Care Retirement Plans

Retirement Plan Offered by Merged or Acquired Organization
0%
10%
20%
30%
40%
50%
60%
70%
2014
2015
* Data from Transamerica Retirement Solutions and American Hospital Association survey
“Retirement Plan Trends in Today’s Healthcare Market” 2015

• 32% of health care plan sponsors have recently experienced a
merger or acquisition
• Surviving retirement plan is typically a 401(k)
• Defined benefit plans are only offered as a surviving plan 23%
of the time (down from 32% in 2014)
• Retirement committees also are disrupted
• 32% of health care plan sponsors have recently experienced a
merger or acquisition
• Surviving retirement plan is typically a 401(k)
• Defined benefit plans are only offered as a surviving plan 23%
of the time (down from 32% in 2014)
• Retirement committees also are disrupted
Mergers and Acquisitions

• Recordkeeper sophistication continues to grow
• Open architecture investment windows are becoming the
standard for most providers
• Having the ability to offer any mutual fund or investment
alternative in the marketplace eliminates the need for multiple
recordkeepers
• Significant pricing advantages to having all pension assets with
one provider as well; can be driven down competitively in an
RFP format
• Recordkeeper sophistication continues to grow
• Open architecture investment windows are becoming the
standard for most providers
• Having the ability to offer any mutual fund or investment
alternative in the marketplace eliminates the need for multiple
recordkeepers
• Significant pricing advantages to having all pension assets with
one provider as well; can be driven down competitively in an
RFP format
Consolidating Recordkeepers

• Trending upward but still should strive for universal access to
this type of contribution
• 33% of 403(b) plans offered a Roth contribution in 2015 (up
from 21% in 2014), and 14% of 401(k) plans now offer
• Roth contributions have a huge advantage for your younger
employee population as well as your highly compensated
employees (earning more than $125,000)
• Trending upward but still should strive for universal access to
this type of contribution
• 33% of 403(b) plans offered a Roth contribution in 2015 (up
from 21% in 2014), and 14% of 401(k) plans now offer
• Roth contributions have a huge advantage for your younger
employee population as well as your highly compensated
employees (earning more than $125,000)
Addition of Roth 401(k) or 403(b)

Dynamic Plan Design
Considerations

Trends in Employer Contributions
0%
10%
20%
30%
40%
50%
60%
70%
Matching Stated
percent of
salary
Hybrid
2014
2015

• Employer matching contributions continue to be the most
common type of contribution
• Significant increase in hybrid funding arrangements, increasing
from 10% in 2014 to 17% in 2015
• Many committees are starting to look at how the retirement
plan can be more attractive to incoming recruits
• Designing employer contributions to reward loyalty and tenure
• Employer matching contributions continue to be the most
common type of contribution
• Significant increase in hybrid funding arrangements, increasing
from 10% in 2014 to 17% in 2015
• Many committees are starting to look at how the retirement
plan can be more attractive to incoming recruits
• Designing employer contributions to reward loyalty and tenure
Plan Design Considerations

Today’s Changing
Regulatory Landscape

• Economic Growth and Tax Relief Reconciliation Act of 2001
• Sarbanes-Oxley Act of 2002
• Pension Protection Act (PPA) of 2006
• Fee disclosure requirements of 2012
• ERISA 404(c) Compliance
• 3(21) vs 3(38) Fiduciary Oversight
• Fiduciary Rule of 2017
• Economic Growth and Tax Relief Reconciliation Act of 2001
• Sarbanes-Oxley Act of 2002
• Pension Protection Act (PPA) of 2006
• Fee disclosure requirements of 2012
• ERISA 404(c) Compliance
• 3(21) vs 3(38) Fiduciary Oversight
• Fiduciary Rule of 2017
Regulatory Landscape Continues to Change

Novant Health Excessive-
Fee Settlement
CASE STUDY:

• Four-state integrated health network
• Currently has over 1,200 physicians and 25,000 employees
across 500 locations
• In 2015, the participants of the Novant Health Retirement Plan
were awarded $32 million over excessive fees and other
fiduciary violations in the administration of Novant Health’s
retirement plans
• Four-state integrated health network
• Currently has over 1,200 physicians and 25,000 employees
across 500 locations
• In 2015, the participants of the Novant Health Retirement Plan
were awarded $32 million over excessive fees and other
fiduciary violations in the administration of Novant Health’s
retirement plans
Novant Health

• The lawsuit alleged that Great West Life & Annuity Insurance Company (now Empower), the
recordkeeper for the plans, received excessive compensation of approximately $8.6 million
between 2009 and 2012 in the form of revenue sharing.
• In a statement of non-opposition in support of the proposed settlement, Novant Health
stated it disagrees with the claim that it breached its fiduciary duties under ERISA by
maintaining retail-class investment funds in the plan instead of institutional shares.
• Novant Health claimed that the lawsuit did not take into consideration what the revenue-
sharing payments paid for, in Novant Health’s case, recordkeeping and administration.
Novant Health’s claim that total plan costs were identical did not sway the court, which
determined Novant Health breached its fiduciary duty.
• The lawsuit alleged that Great West Life & Annuity Insurance Company (now Empower), the
recordkeeper for the plans, received excessive compensation of approximately $8.6 million
between 2009 and 2012 in the form of revenue sharing.
• In a statement of non-opposition in support of the proposed settlement, Novant Health
stated it disagrees with the claim that it breached its fiduciary duties under ERISA by
maintaining retail-class investment funds in the plan instead of institutional shares.
• Novant Health claimed that the lawsuit did not take into consideration what the revenue-
sharing payments paid for, in Novant Health’s case, recordkeeping and administration.
Novant Health’s claim that total plan costs were identical did not sway the court, which
determined Novant Health breached its fiduciary duty.
Novant Health (continued)

Novant Health Argument Visualized
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
Retail
Investments
Institutional
Investments
Administration
Expenses
Recordkeeping
Expenses
Fund Expenses

• Eliminate revenue sharing
• Having a documented fiduciary process is more important than ever
• What fees are, how they are paid, and how they are benchmarked
should be explicitly stated in the committee’s bylaws and investment
policy statement (IPS)
• A competitive bidding process should be conducted every 3 to 5 years
• Strive for fixed-fee pricing arrangements (flat dollar per participant is
becoming the most common)
• Eliminate revenue sharing
• Having a documented fiduciary process is more important than ever
• What fees are, how they are paid, and how they are benchmarked
should be explicitly stated in the committee’s bylaws and investment
policy statement (IPS)
• A competitive bidding process should be conducted every 3 to 5 years
• Strive for fixed-fee pricing arrangements (flat dollar per participant is
becoming the most common)
Novant Health Lawsuit Takeaways

Defined Benefit Plans

• The Pension Protection Act of 2006 changed the funding
requirements for pension plans effective 2008
• Designed to force sponsors to fully fund their pension plan over
7 years
• 100% funding percentage should have been achieved by 2015
if everything worked out
• The average funded percentage in 2008 was about 79%
• Plan Sponsor magazine recently reported that the current
average funded percentage is 77%
• The Pension Protection Act of 2006 changed the funding
requirements for pension plans effective 2008
• Designed to force sponsors to fully fund their pension plan over
7 years
• 100% funding percentage should have been achieved by 2015
if everything worked out
• The average funded percentage in 2008 was about 79%
• Plan Sponsor magazine recently reported that the current
average funded percentage is 77%
Defined Benefit Funding

Plan
Sponsors
Investment
Risk
Interest
Rate Risk
Longevity
Risk
Regulatory
Risk
Pension Risk Universe

‐13.9%
11.1%
12.3%
7.7%
10.7%
15.6%
12.4%
1.3%
‐20.0%
‐15.0%
‐10.0%
‐5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2007 2008 2009 2010 2012 2013 2014 2015
Hypothetical 60/40 Pension Return
• Sample pension portfolio returns invested 60% equities and 40%
10-year bonds
• Returns have been volatile but produced an average return over the
period of about 6.7%
Investment Return Risk

6.48%
5.87%
5.98%
5.54% 4.40%
4.05%
4.95%
3.95%
4.34%
3.46%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
12/1/2007 12/1/2008 12/1/2009 12/1/2010 12/1/2011 12/1/2012 12/1/2013 12/1/2014 12/1/2015
Citigroup Pension Liability Index
• Interest rates have dropped dramatically over the last 8 years
• The last few years have added increased volatility as well
• Every 100 basis-point decline in interest rates increases the pension liability
by 11% to 14%
Interest Rate Risk

84.3
86.3
85.2
86.2
88.2 88.6
80.2
81.7
82.6
84.3
86.2
86.6
76
78
80
82
84
86
88
90
1980s 1990s 2000s 2010s 2015 2020
Assumed life expectancy for a person at age 65 over time
Female
Male
GAM 1971 GAM 1983 RP‐2000 RP‐2000/AA RP‐2014 RP‐2014/MP‐2015
• Study released by the Society of Actuaries in 2014 showed that
pensioners were living longer than previously assumed
• Increased pension obligations by 4% to 8%
Longevity Risk Exposure

Year Flat Premium Variable % Variable Cap
2007 $31 0.9% N/A
2010 $33 0.9% N/A
2015 $57 2.4% $418
2016 $64 3.0% $500
2017 $69 3.3% $500
2018 $74 3.7% $500
2019 $80 4.1% $500
• PBGC premiums have increased dramatically and now consist of a significant
portion of a plan’s annual administrative expense
• Some plans are paying up to $564 per person to the PBGC
• It’s possible for a plan to pay as much in PBGC premiums as it does to a
participant over his or her lifetime
Pension Benefit Guaranty Corporation Premium Risk

• The Department of Labor recently disclosed a program focusing on the
adequacy of plan sponsors’ procedures to locate and pay benefits to
terminated vested participants
• The failure to identify, locate and pay terminated vested participants can be a
breach of the fiduciary duty of prudence
• Sponsors must be able to show appropriate recordkeeping procedures for
identifying terminated vested participants and the payment of their benefits
• A policy for locating missing participants, including diligent search procedures,
must be in place
• Sponsors must also be able to show evidence of policies and procedures being
in place
• The Department of Labor recently disclosed a program focusing on the
adequacy of plan sponsors’ procedures to locate and pay benefits to
terminated vested participants
• The failure to identify, locate and pay terminated vested participants can be a
breach of the fiduciary duty of prudence
• Sponsors must be able to show appropriate recordkeeping procedures for
identifying terminated vested participants and the payment of their benefits
• A policy for locating missing participants, including diligent search procedures,
must be in place
• Sponsors must also be able to show evidence of policies and procedures being
in place
DOL Investigative Program Into Deferred Participants

Benefit Structure
Funding/Investment
Settlement
Risk Management Path

• Source: Retirement Plan Trends in Today’s Healthcare Market 2015, by
Transamerica
• Sponsors are continuing to evaluate their DB plan offering, given the increased
risk exposure
Benefit-Structure Trends
25%
35% 35%
5%
15%
33%
37%
15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Have DB Plan Active Closed Mixed
Health Care DEB Plan Status
2014 2015

• Dynamic-asset glide-path allocation
– Set automatic investment allocation triggers based on funded
percentage
– Reduce equity risk as funded percentage improves
– Increase fixed-income duration as funded percentage increases
– Attempts to reduce volatility of funded status as funded status improves
65%
70%
75%
80%
85%
90%
95%
100%
105%
110%
Actual Percentage Plan Percentage
F
u
n
d
e
d
P
e
r
c
e
n
t Allocation Trigger
Trigger Growth
Assets
100 10%
95 20%
90 30%
85 40%
75 50%
70 60%
Funding and Investment Trend

• Most Common Settlement Option - Lump-Sum Windows
- Offer bulk lump sums to former terminated vested participants
- Eliminate PBGC premiums for terminated participants
- May offer arbitrage opportunity, as lump-sum amount may be less than
balance sheet liability
- May increase minimum funding though, because lump-sum amount may
exceed IRS minimum-funding liability
- Need to examine if any acceleration of unrecognized losses will occur,
causing unexpected short-term pension expense increase
- IRS is eventually going to increase the lump-sum life-expectancy assumption,
which will increase the cost of lump sums by 4% to 8%, assuming no change
in interest rates
• Most Common Settlement Option - Lump-Sum Windows
- Offer bulk lump sums to former terminated vested participants
- Eliminate PBGC premiums for terminated participants
- May offer arbitrage opportunity, as lump-sum amount may be less than
balance sheet liability
- May increase minimum funding though, because lump-sum amount may
exceed IRS minimum-funding liability
- Need to examine if any acceleration of unrecognized losses will occur,
causing unexpected short-term pension expense increase
- IRS is eventually going to increase the lump-sum life-expectancy assumption,
which will increase the cost of lump sums by 4% to 8%, assuming no change
in interest rates
Settlement Trends

• Alternative Settlement Options
– Annuity purchases
• Buy-In Approach
• Buy-Out Approach
– Longevity Contracts/Swaps
• The Final Alternative – Termination
– Can be expensive
– Potentially exceed balance sheet liability by 20% to 40%
• Alternative Settlement Options
– Annuity purchases
• Buy-In Approach
• Buy-Out Approach
– Longevity Contracts/Swaps
• The Final Alternative – Termination
– Can be expensive
– Potentially exceed balance sheet liability by 20% to 40%
Settlement Trends

• The one upside to low interest rates is that borrowing costs are lower
• PBGC regulatory changes mean paying an implied interest cost of up to 4.1% of
the unfunded pension obligation
• Borrowing to terminate effectively replaces individual variable-rate loan
obligations to participants with a single fixed-debt obligation
• Trades volatile pension expense with ongoing known and budgeted debt
payments
• Should be coordinated with de-risking and/or settlement activity in order to
reduce risk
– Otherwise could actually increase risk to the organization
• The one upside to low interest rates is that borrowing costs are lower
• PBGC regulatory changes mean paying an implied interest cost of up to 4.1% of
the unfunded pension obligation
• Borrowing to terminate effectively replaces individual variable-rate loan
obligations to participants with a single fixed-debt obligation
• Trades volatile pension expense with ongoing known and budgeted debt
payments
• Should be coordinated with de-risking and/or settlement activity in order to
reduce risk
– Otherwise could actually increase risk to the organization
Borrow-to-Fund Strategy

• Define your defined benefit pension endgame strategy
• Review your investment policy against your endgame and coordinate it with
your funded percentage
• Utilize pretermination settlement options to shrink the size of the plan and
minimize risk
– Lump sums
– Annuities
• Examine replacing variable pension liabilities with fixed-debt obligations
• Review current policy for starting deferred vested payments at normal
retirement date and 70.5
• Define your defined benefit pension endgame strategy
• Review your investment policy against your endgame and coordinate it with
your funded percentage
• Utilize pretermination settlement options to shrink the size of the plan and
minimize risk
– Lump sums
– Annuities
• Examine replacing variable pension liabilities with fixed-debt obligations
• Review current policy for starting deferred vested payments at normal
retirement date and 70.5
Recommended DB Takeaways

35
THANK YOU FOR YOUR TIME!
QUESTIONS AND NEXT STEPS?
Retirement Plan Trends in Today's Health Care Market

Mike Kasecamp ‒ CPFA, QKA
Vice President, Retirement Plan Consultant
ckasecamp@cbiz.com | 301.708.1138
Your Presenters
Al Winters ‒ FSA, EA, MAAA
Senior Vice President & Chief Actuary
awinters@cbiz.com | 301.784.2341

Retirement Plan Trends in Today’s Health Care Market: Best Practices in a Changing Landscape

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