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September 20, 1999 01:00 AM

HEALTHY BALANCES: MOST HOSPITAL DB PLANS ARE OVERFUNDED

Terry Williams
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    LINCOLNSHIRE, Ill. -- These are healthy times for non-profit hospital pension plans.

    Most have overfunded defined benefit plans, and close to 50% of their assets are in domestic equities, according to "Hospital Treasury Roundtable," a survey by Hewitt Associates, Lincolnshire.

    This year's survey had 21 participants, compared with 38 in 1998; and the 1999 participants were larger companies, compared with 1998's survey.

    Defined contribution-style plans are increasing among these pension funds, although tax-sheltered annuities -- 403(b) plans -- continue to be the dominant defined contribution design, according to the study.

    Forty-seven percent of non-profit hospitals offered 401(k)-style plans in 1999 vs. 26% in 1998. Portability has driven the hospitals to adopt these plans, according to Tim Solberg, consultant with Hewitt Associates

    "Insurance annuity products are not as portable as 401(k)s," said Mr. Solberg. "Nurses and lab technicians have a lot of turnover. Non-profit hospitals wanted to have plans that were portable."

    Two years ago, non-profit hospital pension funds could not offer 401(k)-style plans, said Mr. Solberg. "The IRS changed some of the rules to allow the hospitals to offer the plans," he said.

    The Small Business Job Protection Act of 1996 restored to non-profit organizations the ability to offer 401(k) plans, said Frank McArdle, a Hewitt principal in the firm's Washington office. The option had been removed by the Tax Reform Act of 1986, he said.

    According to the study, a greater percentage of the hospitals offered employees tax-sheltered annuities with 401(k)-like features in 1999 than in the previous year; 82% allowed employees to direct employer contributions to more than one investment option in 1999, compared with 78% the year before.

    All of the non-profit hospital pension funds surveyed in 1999 allowed employees to transfer balances between fixed and variable funds, compared with 94% in 1998; and 60% of the non-profit hospitals surveyed in 1999 allowed participants in the tax-sheltered annuity to have access to multiple vendors, compared with 58% in 1998.

    The greater allocation to domestic equities was attributed to a rise in stock prices, rather than increased allocation to equities, said Mr. Solberg. Conversely, the average allocation to international equities declined to less than 1% in 1999, compared with 9% in 1998, according to the Hewitt survey.

    Mr. Solberg attributed the decline in international equity to withdrawals from the asset class as well as equity performance. "Some of them that got in, got scared and got out," he said. "Others lost money.

    "Last year was a terrible year for emerging markets."

    The percentage of non-profit hospital pension funds that have social restrictions prohibiting investments in certain industries increased to 60% from 51%.

    More non-profit hospital pension funds shun tobacco stocks than stocks from any other industry; 44% of the respondents said they prohibited tobacco investments in 1999, compared with 41% in 1998.

    Other prohibited industries include: for-profit hospital corporations, with 39% of respondents prohibiting the investments in 1999 vs. 24% in 1998; birth control manufacturers, 39% vs. 22%; alcohol companies, 17% vs. 16%; defense contractors, 28% vs. 16%; gambling, 17% vs. 16%; and stocks of nuclear power companies, 33% vs. 14%.

    According to the survey, 8% of last year's respondents said they restricted investment in companies that caused environmental problems; this year none of the respondents said they restricted investments in those companies. Mr. Solberg believes the respondents probably included those companies in other categories.

    "They might have considered nuclear (power) an environmental concern," said Mr. Solberg.

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