Not-for-profit hospital pension funds are bucking the trend that has resulted in defined benefit plans being replaced by defined contribution plans, according to Retirement Benefits at Not-for-Profit Hospitals, a study by William M. Mercer Inc.
Cash balance plans, however, are beginning to appear in this segment of the plan sponsor universe, according to the Mercer study, for which it surveyed 212 hospitals.
The study concluded:
* defined benefit plans are still the major retirement program of the survey participants, with 45% of the respondents offering them exclusively, compared with 21% that offered just a defined contribution plan;
* most of the respondents (83%) made no changes to their defined benefit plans during the last three years; and
* the participants were more likely to make changes to the defined contribution plan, with 21% adding or expanding employer contributions in the past three years.
"Conventional wisdom holds that defined benefit plans are disappearing from the U.S. workplace, and defined contribution plans are taking over," said Mercer Principal Michael Footer in the report.
"In the health care industry, however, the demise of the DB plan is far from imminent, as our survey confirms. Rather than terminating their plans, hospitals are supplementing them with a variety of DC arrangements."
Cash balance plans, a form of defined benefit plan, have attracted the attention of plan sponsors in the health care universe.
"Large health care institutions tend to have more interest in the cash balance concept than smaller ones, as might be expected," said Mr. Footer.
He attributed that interest to the consolidation of independent hospitals into integrated health care systems. The pension funds, as a result, also need to be merged within the new company.
"Many retirement experts believe a cash balance approach is an easy and understandable way to integrate plans and increase employees' appreciation of the benefit," said Mr. Footer.
Within the past three years, 6% of respondents converted their defined benefit plans to a cash balance formula, according to the study.
Private not-for-profit hospitals increasingly are recognizing the need to encourage their employees to save for retirement, and they are providing incentives to do so without reducing payments from the core defined benefit plan, said Mr. Footer.
Of the number that offered 403(b) plans -- exclusively or as a supplement to a DB plan -- 55% had a combination of employer and employee contributions vs. 22% with employee contributions alone; 13% of those that offered 401(k) plans had employer and employee contributions vs. 1% that had just employee contributions.
Private not-for-profit hospitals prefer 403(b) plans to 401(k) plans, according to the study. Mr. Footer surmises this is due to the relative ease of meeting the 403(b) plan annuities' universal availability test, compared with the non-discrimination tests required of 401(k) plans.
The tax-sheltered annuities of the 403(b)s also provide the hospitals with flexibility in plan design, according to Mr. Footer.
IRS section 415 generally limits employee and employer contributions to the lesser of 35% of pay or $30,000. A tax-deferred annuity has one 415 limit, and a qualified plan has another one.
"So for employees who want tax-sheltered annuity contributions up to the limit, employer matching contributions can be made to a separate qualified plan, allowing the employees to receive the full value of the employer contribution and not be restricted in their salary reduction amounts," said Mr. Footer.
"By combining a tax-sheltered annuity for salary reduction contributions with a 401(a) profit-sharing plan for matching contributions, an employer can have the best of both worlds."
