Cash Balance pension plans, private health insurance exchanges, defined contribution benefits – how consulting firms and employers changed America

If you were in the consulting business how would you make money? You would churn out new ideas, convince employers to adopt them and rake in big bucks helping employers implement, manage, and communicate your ideas. Then you would start all over with a new idea and a new direction. Employee benefit consulting firms have no concern for the impact these ideas have on individual employees, they work for the employer whose only goal, despite all the platitudes and buzz words, is to manage costs and save money. Consulting firms and employers are great at positioning these benefit plan changes in ways that sound high-minded with the primary goal of benefiting the worker.

Let me see if I can say this delicately … Bullshit!

The fact is that the changes designed and recommended by consulting firms and adopted by employers over the last several decades have profoundly changed America, changed the concept of retirement and in the future will change health care as well… and not for the better.

Thirty years ago over sixty percent of American workers participated in a defined benefit pension plan with the promise of an annuity for life upon retirement. This along with Social Security and personal savings provided many Americans with a secure retirement. In the old days we used to call it the three-legged stool of retirement income. Today one leg is gone, one is teetering and the third has been gnawed away by the stock markets. By 2009, the last year for which data are available, only 16 percent of private-sector workers were active participants in defined-benefit plans, compared with 74 percent of public-sector workers. What happened? There are several contributing factors to this change, but the bottom line is that traditional pension plans became expensive to operate and a drag on corporate finances. In 1985 a consulting firm came along with a “better idea,” the cash balance pension plan.

Cash balance plans while technically a defined benefit pension provide much lower benefits, cost less to fund and create the environment where participants take a lump sum payment rather than annuity for life; a very bad idea. The song and dance selling these plans was that they would be more appreciated by workers, they could see their benefits grow, they could more readily take their benefits with them. What they forgot to tell workers was that this was the beginning of the end of retirement as we knew it.

Next came the 401(k) plan, again pushed by consulting firms first as a supplement to the traditional pension, but as we all know eventually the only employer based form of retirement security. Many employers, including some of America’s largest, transitioned from a traditional pension to cash balance to 401(k) each time telling employees how it was really for their benefit, not just to save money. How’s that working out for you? As of May 2012 the average balance in all 401(k) accounts is just over $60,000, according to the Employee Benefit Research Institute. Even people within 10 years of retirement have saved an average of only $78,000, and more than a third of them have less than $25,000. Seventy-eight thousand dollars is sufficient to provide a single life annuity of about $432 per month. More than half of U.S. workers have no retirement plan at all.

America is going to pay a heavy price for the elimination of annuity pensions and creation of greater reliance on Social Security to fill that gap.

Now health benefits are on the block

The latest idea and one that sounds the death knell for employer health benefits is the private health insurance exchange. Here the story line is not saving money, but giving workers more choice. In reality what is happening is a voucher system whereby the employer gives the worker a pool of money and the worker selects a health plan from among “competing” insurers arranged for and organized by the consulting firm. Also what is happening is the employer detaching itself from running a health benefits program. Over time the employer contribution will increase only by the minimum amount possible, but of course the worker will be free to “choose the plan that best meets his needs.” Does this concept sound familiar?

These private exchanges are insured which means that large employers are giving up their self-insured plans where the bulk of costs are for claims incurred by employees and their families and where the employer negotiates administrative fees. The absurdity of this one is that the insurance companies will compete for the employees and thereby lower costs. What have insurance companies been doing for decades if not competing for customers?

Consultants and any employee benefits professional with half a brain (of which there apparently are many) know that competing insurers have little to do with controlling health care costs not to mention employers are adding costs by going from self-insured to insured status. The way Plan A will be cheaper than Plan B is if it provides less coverage, has higher out-of-pocket costs and/or restricts the network of providers. That’s the choice workers have when they spend the employer contribution, a choice between premiums and out-of-pocket costs.

Initiated by the Affordable Care Act employers have also been cajoled into moving retirees from the group plan into Medicare Part D for prescription coverage.

The next logical move will be to simply eliminate the employer private exchange, pay any penalty and move workers into the new state or federally run Exchanges to take advantage of government subsidies for the vast majority of Americans.

For health benefits as well as pensions we are moving from a defined benefit approach to a defined contribution that the employer can control. It is about workers picking up all of the cost beyond what the employer decides it wants to pay. Some people will argue that’s the way it should be, that’s fine except for the fact it flies in the face of reality.

The disappearance of pensions and now employer sponsored health benefits is not good for America. We all know Social Security and Medicare are not in great shape, we know that the Affordable Care Act will add billions and billions of liability on the federal government in the form of Exchange subsidies. And now we know what employers have been doing and continue to do will increase pressure on all these programs.

It is well documented that the average worker has no clue about what it takes financially to retire, or what health care will cost when they do retire. 401(k) account balances even for workers nearing retirement age (or what used to be retirement age) are pitiful in terms of creating an income for thirty years in retirement. Beyond that even individuals with considerable assets face the difficulty of investing and using those resources so as not to outlive them.

For a different perspective on retirement satisfaction look at this report from Towers Watson.

We are a conflicted society. Some of us want small government, others want more safety nets provided, some want to push responsibility on the individual and others see society having a greater role. No matter your position, workers cannot and do not have the discipline to both save for retirement and pay ever increasing in health care costs. Employers who think they do are making a big mistake.

We are running out of time to get this right.