Success Stories

Not-for-Profit Health Care System with Obligations for Cumbersome & Costly Pension Plan

Services – Strategic Planning, Benefit Strategy, Retirement Plan Design, Vendor Search & Negotiations, Communication, Branding, and Change Management, and Branding

The Situation
A major not-for-profit health care system in California was experiencing extreme fluctuations in pension contribution requirements due to antiquated plan design, poor investment performance, and dilution of plan oversight accountability. The Board had originally sought a consultant to assess alternative DB plan arrangements, but we suggested that a “blank sheet of paper approach” (i.e., one without preconceived outcomes) would be better suited to build the employee consensus and buy-in needed to successfully effect program changes.

Key Challenges

• The plan itself, implemented in the mid-1960s, was no longer in line with market norms. It was also complex to administer, difficult to communicate and understand, and extremely high-cost relative to the level of retirement benefits provided.
• Poor investment performance and diluted oversight responsibilities led to multi-million-dollar swings in employer funding obligations. As a not-for-profit entity, the system was unable to afford the volatility. The plan was simply unsustainable.
• Employees and management were unaware of plan’s uncompetitive nature and inability to provide a meaningful level of retirement income. Despite the fact that the system was known as a “career employer,” even long-term employees would be able to afford to retire under the antiquated plan.
• Although the plan was a complicated and, ultimately, inadequate retirement vehicle, employees had a deep-seated and emotional sense of connection to it, and were resistant to the idea of change.
• As a public entity, the system relied on an array of local vendors who, while well-intentioned, were unable to provide the level of efficiencies and services an employer of the system’s size would ordinarily merit.
• The system had not invested much in employee communication. Employees were largely unaware of the role of the pension plan – and the need for them to also contribute toward retirement. As a result, only about a third of the group participated in the 403(b) plan.

Our Approach

To address the “root causes” of the problem, our staff took the following steps:

• Worked with the Board to articulate a new set of objectives, standards, and guidelines for the system’s retirement program – the first time a Board had done so since the initial plan implementation in the mid-1960s.
• Met with executives, managers, and employee focus groups to gain their perspective on benefit priorities and needs.
• Based on the Board’s objectives and participant input, designed a strategy to:
• Freeze future accruals under the pension plan, and
• Implement a dynamic new DC plan to replace it.
• Customized the DC plan design so participants could exceed benefits available under the pension plan.
• Conducted a search for, and completed negotiations with, top-tier investment management and plan administration vendors.
• Created a framework for plan monitoring and fiduciary oversight to ensure Board compliance with best practices.
• Developed a communication strategy to engage employees in retirement planning.  Approach included mix of print materials, Web resources, and on-site meetings facilitated by our staff.

Results

• Fulfillment of Board fiduciary obligations in assessing, implementing pension changes.
• Richer benefits for employees, and, by reducing volatility and bundling administrative services, significantly lower costs for the organization.
• Thanks to the customized plan design and extensive communication/education campaign, employee participation rates doubled – and the average contribution level exceeded 9% of pay.
• Not just avoidance of employee pushback, but increased appreciation for Board in placing employee interests first.