Ken Boggs, CFO at Moses Cone Health System, a five-hospital, integrated care system based in Greensboro, NC, says it froze the defined-benefits plan to new employees in 2002. “The primary issue is the variability of the contribution expectation every year because it swings with the current interest rates every year,” Boggs says.
The recent low interest rates to spur investment also have reduced earnings for Moses Cone’s defined-benefits plan. Boggs says the health system had to contribute another $5 million to fund the plan, which had to come from operating margins of $40 million. “It’s a substantial share of the margins, even though it’s not a substantial share of the total expenses,”
Boggs says. “The variability is a big factor because that hits your income statement and that is either a big hit or a big windfall depending upon which way the interest rates are going that year. Nobody likes financial unpredictability.”
While Boggs acknowledges the potential for friction between the longer-serving employees with defined benefits, and their newer colleagues with defined contributions, he says there is no indication that the freeze has hurt recruiting or retention. “As long as you have a retirement plan, it is not an issue for recruiting. If for some reason you decided you weren’t going to have a plan at all, it probably would be an issue,” Boggs says. “But I don’t know that people distinguish between defined benefits and defined contributions, and more and more of our competitors also have the defined-contribution plans, so I don’t think it’s much of a differentiator.”
Debbie Ortega, vice president of shared services—human resources at St. Joseph Health Systems in Orange, CA, which operates five acute care hospitals in Southern California, says many new employees “struggle with understanding” the difference between defined-benefits and defined-contribution plans. SJHS offers only defined-contribution plans, and Ortega says that appears to suit many of the health system’s recruits, particularly people in their 20s and 30s whose concerns are not necessarily centered around where they will retire in 40 years.
Younger workers have become used to the more ubiquitous defined contribution plans, such as the 401(k), and Ortega says they would likely be incentivized more by attractive employer funding matches and the ability of employees to manage accounts themselves and choose their own investments. “I will say that in the last five years I’ve seen a much more notable interest with younger folks,” Ortega says.