By William Marty Martin
Changing or converting retirement benefits can save hospitals money. But is it the right thing to do?
Across the globe, there is unease about the future of retirement-from Paris where riots erupted over pension cuts to Illinois where public sector employees marched on the state capital to secure tax increases to fund their retirement.
In comparison, healthcare organizations are relatively quiet. However, I would argue that many hospital employees are also nervous about the future of their retirement benefits. Boards and executives are meeting armed with actuarial estimates, demographic forecasts, and legal opinions to determine whether to modify or even completely drop retirement benefits.
The financial arguments for scaling back retirement benefits or converting defined benefit (DB) plans to defined contribution (DC) plans are many and compelling. Yet, a review of the ethical dilemmas that arise when enacting such changes is in order.
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First, Do No Harm
I serve as a board member of Aurora Health System, and the agenda recently centered on making changes to the current retirement package-a change that would impact thousands of employees and their dependents. The discussions naturally focused on the financial and legal aspects of proposed change. But, to my delight, there was also an emphasis on how these proposed changes were aligned with the health system's mission and values. Moreover, there was a real discussion about the impact of these changes on the lives and well-being of employees and their dependents.
Schwartz and his colleagues wrote the following in The Journal of Business Ethics: "Boards and directors play a critical role in overseeing ethical performance of their organizations. Vigilant boards should be capable of preventing ethical disasters involving firms."a
In the case of retirement benefits, the dominant ethical dilemma is the harm that current and future beneficiaries will experience. In reference to retirement plans, Fitzpatrick and Chu observe, "Employees covered by the plans fear they will not deliver on the promises of employers made to provide financial security after retirement."b
Attention to ethics and the fiscal bottom line are not mutually exclusive. In recent years, an increasing number of organizations are converting DB plans to DC plans. But DC plans, such as 401k plans and 403b plans, are not risk free. They fall victim to market shocks, such as the 2008 financial meltdown. It was estimated that 401k plans and IRAs lost nearly $2 trillion in value from October 2007 to the end of 2008, according to research at Boston College's Center for Retirement Research. In DC plans "the risk of investment gain and losses" is shouldered by employees, writes Wiatrowski.c
Moreover, one study by Spetz and Adams found that individuals would trade off a new job to be vested in a DB plan.d Although this study only looked at nurses, it may be reasonable to assume that other healthcare workers may make a similar decision.
Stein writes, "We should not lose sight of the fact that there is an enormous unfunded retirement liability for participants in 401(k) plans."e Unlike qualified DB plans, which promise specific monthly retirement income, DC plans are really "you're on your own plans." There is no guarantor.
An Ethical Approach
Financial leaders and board members can adopt the following recommendations to ensure that retirement plan decisions are not solely focused on the money.
Adopt a stakeholder approach. A stakeholder approach first categorizes individuals and organizations that have an impact (good or bad) on the hospital, or are affected by the hospital (good or bad).
As it relates to retirement, internal stakeholders include employees and their families. External stakeholders include members of the business community and government agencies that benefit from the retirement income of former employees or that have to financially subsidize hospital retirees' income.
Identify the ethical dilemmas for each stakeholder. Boards make decisions with input from the CFO about whether to convert DB plans to DC plans. This decision is more than a financial decision because current hospital employees may be harmed economically.
Another ethical dilemma is to fail to adequately address the widespread financial literacy gap with rigorous financial education. If a hospital moves to a DC plan, then plan participants need to have sufficient knowledge to bear the risk of investing.
See the sidebar for how-tos on providing workplace financial education.
Formulate a strategy to eliminate or lesson the ethical dilemmas. The first step in framing retirement issues as ethical issues is to ask the following question: Who will be harmed or helped as a result of us making this decision?
A follow-up analysis involves determining the relative costs and benefits of each of the proposals, scenarios, or models, realizing that different stakeholders experience different costs and benefits.
Engage the workforce and current retirees in learning how to become better fiscal stewards (regardless of the plan type). A 2008 report from the President's Advisory Council on Financial Literacy identified employers as being in a powerful position to address financial literacy.f
The report points to a survey of CFOs and other senior executives about getting employees to participate in the company's 401k plan. Eighty percent of respondents said that financial literacy among employees was the most significant challenge.g
Another survey showed that employee respondents would overwhelmingly like to get more financial training from their employers, including seminars on personal finance, savings and budget tools, and access to financial planning experts.h
Evidence is mounting that financial stresses at home translate into higher absenteeism and reduced productivity on the job. Giving employees the knowledge and tools they need to deal with financial problems may help offset these issues. One study found that after participating in a workplace financial literacy program, 87 percent of employees said they wanted to help their organizations become successful and 82 percent reported feeling proud to work there.i
See the sidebar for how-tos on providing workplace financial education.
Hold one another accountable. Hospital leaders need to agree to view retirement plans from a perspective that includes-rather than marginalizes or ignores-ethical considerations.
One of the unspoken truths about organizational life is that most change and monitoring requires a guardian or steward. This guardian needs to be in a position of formal authority and have sufficient informal power to raise ethical issues, guiding the board and senior leaders in an ethical analysis of any decision that could financially impact employees and retirees.
Are you that guardian or steward? Or are you waiting for the person sitting to the left or right of you to step up and assume this role?
Remember, it's not all about the money. Decisions about retirement plans should consider factors related to preventing harm and even promoting benefit to employees, their dependents, and the larger community.
William "Marty" Martin, PsyD, MPH, MA, MS is director, health sector MBA, and associate professor in the department of management, The College of Commerce at DePaul University, Chicago, Ill. (MARTYM@depaul.edu). Marty also consults with Aequus Wealth Management in the areas of behavioral finance and financial education. In addition, he serves on the board of Aurora Health System and chairs the Social Responsibility Committee, which is responsible for policy making and oversight of community benefit.
Marty welcomes comments and questions from healthcare finance leaders related to this article. In addition, Marty is interested in networking with healthcare finance leaders on the following topics behavioral finance, financial education, socially responsible investing and community benefit.
Potential Discussion Starters
Share your thoughts, ideas, and comments about this article on the CFO Forum Linked In discussion board.
- What ethical, legal, or financial dilemmas has your organization run into when contemplating retirement plan changes? How have you resolved these dilemmas?
- How can healthcare finance leaders encourage financial literacy among employees, retirees, and even patients? Are you doing anything in this area?(See Creating a Workplace Financial Literacy Program.)
Or perhaps you have another discussion starter?
a. Schwartz, M.S., Dunfee, T.W., and Kline, M.J. "Tone at the Top: An Ethics Code for Directors? Journal of Business Ethics, 2005, vol. 58, pp. 79-100.
b. Fitzpatrick, R.C. and Chu, H. "The Rise and Demise of Defined Benefit Pension Plans." Employee Responsibilities and Rights Journal, 2007, vol. 19, no. 3, pp. 223-232.
c. Wiatrowski, W. (2008). 401(k) plans move away from employer stock as investment vehicle. Monthly Labor Review, November, 3-10.
d. Spetz, J. and Adams, S. "How Can Employment-Based Benefits Help the Nurses Shortage?" Health Affairs, January/February 2006, pp. 212-218.
e. Stein, N. Statement of Norman P. Stein on "Building a Secure Future for Multiemployer Pension Plans" before the Committee on Health, Education, Labor and Pensions, United States Senate, May 27, 2010.
f. 2008 Annual Report to the President, President's Advisory Council on Financial Literacy Report, The Department of the Treasury.
g. CFO Research Services and Charles Schwab, A Shared Benefit: Employer Views on the Value of 401(k) Plans. (Cited in President's Advisory Council on Financial Literacy Report, page 23.)
h. Charles Schwab and Co., Inc., Internal Research Document, Insights from Retirement & More Advisory Board: Financial Education in the Workplace. (Cited in President's Advisory Council on Financial Literacy Report, page 23.)
i. Hira, T.K. and Loibl, C. "Understanding the Impact of Employee-Provided Financial Education on Workplace Satisfaction," Journal of Consumer Affairs, 2005, vol. 39, no. 1.
Publication Date: Thursday, January 06, 2011