While not as prevalent as they once were, healthcare pension plans still represent a significant fiduciary obligation.
Although healthcare organizations have been migrating from pensions into 401(k) plans for employees, pensions still represent a hefty portion of retirement programs and, in some places, are even making a comeback, financial specialists say.
As with other areas of the economy, healthcare employers are scaling back defined benefit pensions in favor of defined contribution programs that put more onus on employees for retirement savings. It is part of what healthcare economist David Marcinko calls "a sea change that has occurred over the past decade" in terms of pension displacement.
"The migration from legacy plans to defined contribution plans mirrors what is happening with the greater economy," said Marcinko, CEO of the Institute of Medical Business Advisors in Technology Park, Georgia. "The tipping point came six, seven, eight years ago when legacy pension plans tilted toward 401(k)s and defined contribution that shift the financial burden to the employee."
Fulfilling pension obligations continues to be a daunting proposition, however, as the U.S. represents the largest pension market internationally, comprising nearly 60 percent of pensions worldwide, according to global professional services company Towers Watson. In distilling pension assets specifically for U.S. healthcare, Marcinko sets the figure at about $1.2 trillion industry-wide.
The employer's fiduciary responsibility to pensioners is significant and requires fund managers to find suitable investments for beneficiaries.
"Fiduciary means putting yourself in the shoes of the pensioners and making decisions based on what is best for them, not for you," Marcinko said.
By following the organization's Investment Policy Statement, pension fund managers should have a comprehensive, directional template for investment procedures, Marcinko said. Ranging in breadth from 50 to 200 pages, these documents and guidelines have evolved over the years "from a gut feeling to a scientific approach," he said. Ultimately though, he says that "if you follow the IPS to the letter, you will have the umbrella of liability protection because the plan was approved by management."
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Pension fund management may still be part of a hospital's human resources or administrative function, but Marcinko says it is commonly being outsourced to third parties.
"There is a shift away from doing it in-house," he said. "Nobody wants the liability for it, so they are sending it to contractors who specialize in it. A lot of pensions are underfunded and unlike public entities, they can't raise taxes to get more money."
Just when it appears that defined benefit pension plans are destined to be tossed out, they are finding new life within an increasingly competitive healthcare business environment, said Dennis Parker, private financial advisor for Atlanta-based SunTrust. And adding to the irony is the fact that it is smaller organizations that are bringing it back.
"It is not the larger institutions considering this move – it is the smaller organizations, from solitary practices to 100-person clinics," said Parker, who specializes in investment services for medical providers. "It is an attractive benefits package that can help them land top talent, and although it may cost them more in the short term, it could prove to have substantial financial benefits down the road."