Lessons from the Evolution of 401(k) Plans

Research from Employee Benefit Research Institute has important lessons

Health care consumerism and the move from pensions to 401(k)’s have a lot in common and this research from the Employee Benefit Research Institute should be required reading for anyone in the employee benefits space. Lessons From the Evolution of 401(k) Retirement Plans for Increased Consumerism in Health Care: An Application of Behavioral Research looks at the lessons learned in the evolution of retirement plans and compares that to what’s going on in consumer-driven health care. As responsibility shifts from the company to individual workers, the study looks at key components of program design like offering choices, financial incentives and education and how behavioral research has created some key learnings from retirement plans.

The key lessons from retirement plans:

More choice is not always better. We worked with a client last year to help communicate a major change to their 401(k) which was removing a large number of funds. Over the years, many employers started adding more and more funds to their retirement accounts at the request of a sophisticated group of employee investors or just because their administrators allowed it. But, this paralyzed many employees who were simply overwhelmed by the decisions they had to make. As a result, most companies have now simplified their fund offerings and put in “lifestyle” funds to help employees make good decisions. The same is true of health plans—if you give employees too many options, they are likely to take the path of least resistance and either not make a change or just pick based on premium price, which could have serious financial implications when HSA-eligible high-deductible health plans are on the menu. From the executive summary: “Many, if not most, workers are probably not capable of making the most appropriate retirement planning or health care choices—it is simply too difficult.”

Education and information are not enough. I know, the communications consultant should not be saying this, but it is not enough to just communicate the plans well. They have to be designed well so that they enable employees to make smart choices. And, they have to be designed to match the needs of your workforce. It makes me cringe when an employer plans to aggressively roll out high-deductible health plans with HSAs when a large portion of their workforce is low-income. Don’t expect that employees will know how to make the best decision for their financial situation—help them by understanding your workforce and only giving them choices that make sense.

Financial incentives don’t always work. We know the richest company match is still often not enough to get people in a 401(k). In the health care space, incentives can be really effective in driving participation in programs like health risk questionnaires but they may not be helping employees make the best long-term decisions.

Careful plan design more likely to succeed. Employers have figured out effective 401(k) plan design: automatic enrollment, smart default investment options, automatic contribution increases. “Research has shown how default choices, simplification, framing, and requiring active decisions in 401(k) plans can go a long way toward improving the decisions that workers make. Similar design factors can be applied to employment-based health plans, and plan sponsors are well advised to determine these potential effects ahead of time.”

Ok, so it is early September and your plan design for 2009 is already set. What can you do to help your employees make smarter choices during enrollment? You can require active elections (but don’t go too far and default people to no coverage—just let them know their enrollment is required). And, you can improve decisions by framing choices in a simple way. Bundle multiple decisions in one (like electing the HDHP and contributing to the HSA) and frame alternatives in a way employees can relate to.