Illustration By Olaf HajekBehavioral economics plays a big role in the success of wellness programs
"People are constantly making trade-offs between immediate gratification and delayed benefits," says Kevin Volpp, Associate Professor of Medicine and Health Care Management at the University of Pennsylvania's Wharton School. Employers could get better results in their wellness programs if they focused more on the immediate gratification, say Volpp and a team of academics currently researching the role of behavioral economics in these programs.
Volpp and Wharton School Professor of Health Care Management Mark Pauly call this approach "P4P4P": pay for performance for patients. Too often, they say, employers' wellness programs have had major incentive-related design flaws that hampered results. … Rather, people's psychological motivations should become a key part of wellness-program design, Pauly, Volpp, and their collaborators say, "Our human nature is a combination of rationality and irrationality. It is best to design a program that uses both approaches," Pauly says. "The rational thing is to be conscious of your mortality and doing something about it, … In some ways, life is too short to be rational all the time."
… "We have 25 years of research on the use of behavioral economics on the retirement-planning side, and we are now starting on the health side," says Paul Fronstin, Director of the Health Research and Education Program at the Employee Benefit Research Institute (EBRI) based in Washington. "What employers have learned is that they have not provided the right incentive" in wellness programs. …
What works differs based on the desired behavior change and the particular employees involved. "The whole challenge of the psychology is, what is the trigger point?" says Chris Mathews, a Vice President at The Segal Co. in Washington. Employers know their populations' trigger points better than wellness providers, he says….
Sources point to these ideas for employers to consider when designing a program:
Money often motivates people to participate. … While the Wharton research has not yet determined if it is the best motivator for wellness adherence, Pauly says, "Our visceral feeling is that cash is preferred to income-in-kind." Offer employees $250 off their annual health-insurance premiums for participating, and "many people will not even notice that" … Volpp says. "But if they get a check for $250, that will be very noticeable," he says. …
A reward should materialize soon. … A reward has to be paid close to the behavior an employer wants to encourage, Pauly says. … As [Barry Hall, a Boston-based Principal at Buck Consultants, LLC] says, "There is what we call a 'present bias': People put more value on things that are right in front of them today than things that are off in the future."
Consider making it competitive. Create some type of competitive atmosphere to get people engaged, Robbins suggests. So, a company with multiple sites might have a weight-loss or exercise competition amongst them, he says. …
Ultimately, motivation has to become internal. Incentives do help drive near-term participation "but, when you take them away, most people rebound to their old behavior," says Kathy Harte, East Region Leader of the Hewitt Associates, LLC's Health & Clinical Consulting practice. … For something to become a long-term lifestyle change, the motivation has to shift from an external factor, such as a material reward, to an intrinsic motivation, [Hall] says. Employers can help by creating a "culture of health" in their organizations, he says.
"What has worked is a multiprong approach," Harte says. That means things like senior management leading a lunchtime walking program, middle management supporting employees who need to take a wellness day to get preventive care, and peer-level wellness "champions" who talk informally with co-workers about their success, she says. It also includes subtle messages such as whether staff meetings feature cookies or fruit as a snack, Hall says. "A lot of social things are going on [in those meetings]," he adds. "Is it cool to eat fruit?"
Judy Ward
editors@plansponsor.com
Monday, November 9, 2009
Total Benefits:Pay for (Patient) Performance
Best of both worlds? Combined pension/401k plan
The Associated Press via Google Hosted News
By DAVID PITT (AP) – November 7, 2009
DES MOINES, Iowa — Over the last year it's become abundantly clear that the stock market can devastate even seemingly healthy retirement accounts. …
The vulnerabilities of the 401(k) plan have cast doubt on whether a voluntary savings plan is the best way for workers to prepare for retirement. There are some possible alternatives coming, however, that might just catch on. One that may become available in January offers a guaranteed pension-like retirement benefit alongside a 401(k).
It's called the DB(k) and it was created in the tax code in 2006. The law allows companies with fewer than 500 workers to start the hybrid plan after Jan. 1, 2010 …
Here are some questions and answers that explain details of the DB(k):
Q: What are the basic features of the DB(k)?
A: There are two components to the plan:
Companies will be required to establish a pension fund sufficient to pay a worker in retirement up to 20 percent of that individual's average annual pay received during the last few years of work. After three years with a company, a new employee's benefits will be vested. … Their balance in this account would be paid out at retirement in monthly checks like a traditional pension plan. …
Alongside that benefit, the company will automatically take 4 percent of a worker's pay and put it in a 401(k) plan. The company must match 50 percent of that amount, which would be immediately vested. At retirement, the worker could withdraw additional funds from their 401(k) account to supplement the pension payments. Workers can opt out of their contribution or chose to set aside less.
Q: What's the reason for creating a hybrid pension/401(k) plan?
A: … More companies are dropping pension plans and workers with a 401(k) often do not save enough, leaving U.S. workers woefully unprepared financially for retirement. A recent study by The Center for Retirement Research at Boston College concluded that 51 percent of households likely will not have enough money in retirement to maintain their lifestyle, up from 44 percent in 2007.
The DB(k) idea allows companies to provide the benefits of a combined plan without onerous paperwork, regulatory requirements and costs that would come with operating the two plans separately, said Chris Mayer, a Principal Financial Group vice president. Workers get a more secure retirement with the guaranteed pension alongside their own savings.
Q: What types of companies would want to offer a DB(k) and why?
A: Companies must have at least two employees and cannot have more than 500 workers to implement a DB(k) plan. These plans are most likely to be offered by companies looking for professional workers in competitive fields — those who feel they need to offer this enhanced retirement plan to attract the best in their field or keep workers from going to a competitor, said Jan Jacobson, a spokeswoman for the American Benefits Council. …
Employers must completely fund the pension and provide matching contributions in the 401(k) plan. As a result, those adopting this plan need adequate cash to pay the cost, which Principal Financial's Mayer estimates to be about 6 to 8 percent of payroll. … [Companies] currently managing both a pension and a 401(k) might consider the new plans to reduce costs and paperwork.
Q: How soon are we likely to see DB(k) plans launched?
A: The DB(k) is authorized by the Pension Protection Act of 2006, which authorizes companies to begin offering the plans starting on Jan. 1. However, the Internal Revenue Service and the U.S. Treasury only recently began developing rules for the plans, so adoption may be delayed until later next year. …
Q: How can I find out more?
A: … If you want to do further research, you can find information by searching "DB(k) plan." The government frequently refers to the plans as "eligible combined plans" in its documents. You may also find some information under the IRS designation 414(x), which is the section of the tax code relating to the retirement accounts. The IRS details the plan in a document at: http://www.irs.gov.
Many details about the practical operations of DB(k) plans will not be known until the IRS and Treasury officials complete and publish the final rules, which could affect the number of interested companies.
Copyright © 2009 The Associated Press. All rights reserved.
Monday, November 2, 2009
What Sponsors and Advisors Should Know About Retirement Plans
October 28.2009
According to a 2007 U.S. Labor Dept. survey, 68% of small business owners feel unprepared for retirement and just 42% maintain a retirement plan. Here are four frequently overlooked tips about retirement plans for plan sponsors and their advisors.
John Carl
- Understand the "controlled group" opportunity. If you or your spouse own and/or control several businesses, the IRS may require you to treat all of your businesses as one for certain retirement plan purposes. The controlled-group rules can affect retirement plan selection and operation and could mean higher deductible contributions.
- Determine your contribution budget. … For example, if your goal is to contribute more than $49,000, you will need to consider a defined benefit plan; a lesser figure can be served by such options as a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) IRA, or 401(k)/profit sharing plan.
- Shop around. Fees for establishing and maintaining plans vary enormously. … [You]can …evaluate how much you are paying for such things as plan investments and record keeping. In fact, it is your fiduciary duty to do so.
- Keep good records. … Having an investment policy statement and documenting your activities for reviewing and evaluating your plan investments are good ways to start.
President
Retirement Learning Center
Brainerd, Minn.
Fiduciary Liability Insurance vs. ERISA Fidelity Bonds – What’s the Difference?
This article addresses an issue that every plan sponsor should consider whether they have ever been sued or not. We’re talking about the issue of insurance, and more particularly, the distinction between fidelity bonds and fiduciary liability insurance.
The issue is important because some confusion exists among retirement plan sponsors about their insurance needs. … Among other things, they learn that a bond is required by the Employee Retirement Income Security Act (“ERISA”). …
Under the bond requirement statute (ERISA §412), every fiduciary of an employee benefit plan and every person who “handles funds or other property of such a plan” is required to be bonded. The amount of the bond is 10 percent of the amount of the plan’s assets as of the beginning of each plan’s fiscal year. Unless the plan holds company stock, the maximum amount of the bond is $500,000. The statute requires the bond to “… provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of the plan official, directly or through connivance with others.” (Emphasis added.)
… For example, assume a plan has $7 million in assets as of the beginning of its fiscal year. Its bond amount is set at the statutory maximum of $500,000. The company’s CFO is a member of the plan’s administrative committee along with its CEO and COO. …
Over a period of months, the CFO writes checks for “consulting fees” to a dummy corporation. The dummy corporation in turn routes the plan’s money back to the CFO. The embezzlement is never detected until the CFO resigns. In that instance, the bond required by the statute may provide protection to the plan up to the maximum amount of the bond – $500,000.
Let’s assume, however, that the former CFO absconded with a total of $1.5 million. Even after the bond company pays the total amount of its liability under the bond, the plan is still out $1 million. Not surprisingly, the participants are upset and question why the other members of the administrative committee – the CEO and the COO – failed to prevent the loss from occurring. … [Neither] the CEO nor the COO was complicit with the CFO. Rather, they were simply ignorant of what the CFO was doing. In other words, one might argue that the plan lost money for two reasons: (1) the CFO’s theft and (2) the innocent breach of fiduciary duty by the CEO and COO. The former is covered by the bond. The latter is not.
These facts are skimpy and we couldn’t say – without knowing more – whether the CEO and COO would ultimately be liable for a breach of fiduciary duty. That issue is secondary, however, to how the fiduciaries will pay the cost of defending themselves against the claim. The answer may be fiduciary liability insurance. …
Several companies offer fiduciary liability insurance designed to cover claims and losses arising out of claimed breaches of fiduciary duty. … The plan itself can purchase liability insurance for its fiduciaries as long as the policy allows the insurer to seek recourse against the fiduciary if the fiduciary is determined to have breached his duty to the plan. Otherwise, the employer or the fiduciary himself can purchase insurance. …
There are several issues to think about in considering fiduciary liability insurance. Among them: the annual premium cost; the amount of coverage needed; the amount of any deductible; whether the deductible is charged any time a claim is made or only if there is a settlement or judgment, and; whether the limits of liability under the policy are reduced by attorneys fees and costs incurred in defending against a claim.
Fiduciaries are personally liable for losses incurred by a plan due to their breach. Although it isn’t required by ERISA – as is a bond – every fiduciary of an ERISA plan should seriously consider obtaining fiduciary liability insurance.
Any tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein.
© 2009 Reish & Reicher, A Professional Corporation. All rights reserved. THE ERISA CONTROVERSY REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.
Defined Benefit 401ks set to make their debut
Posted by gailperry in on 10/29/2009 - 12:19
Small business owners have plenty of options to choose from when it comes to a qualified retirement plan for the company. It can range from a Savings Incentive Match Plan for Employees (SIMPLE) to a Simplified Employee Pension (SEP) to a 401(k). But now there’s a new kid on the block.
Strategy: Consider the defined benefit 401(k) plan (called the “DB/401(k)” for short) for small business clients. This hybrid plan combines some of the advantages of a traditional pension plan with a regular 401(k).
…The authority for this new plan, which becomes available on Jan. 1, 2010, was buried deep within the massive Pension Protection Act of 2006. But interest in DB/401(k)s is expected to heat up during the coming year. …
… It is available for the 2010 plan year to employers with at least two employees and no more than 500 employees.
The DB/401(k) combines a defined benefit plan based on final average pay with a safe-harbor 401(k). Two requirements:
1. The defined benefit part of the plan must provide a benefit equal to 1% of the final average pay times years of service up to a maximum of 20% of final pay. …
2. The 401(k) part of the plan requires automatic enrollment with an employee deferral of 4% of compensation. …
Advisory: If these requirements are met, the company has to file only one document for the plan and one Form 5500, Annual Return/Report of Employee Benefit Plan, each year. Best of all, employers don’t have to undergo the rigorous testing procedures for 401(k)s. Simply make the allowable contributions, file the paperwork and you’re set.
Requirements for automatic-enrollment 401(k)s
Elective Deferrals By Employees
Automatic deferral must equal between 3% and 10% of compensation with:
• At least 3% in the first year of participation
• At least 4% in the second year of participation
• At least 5% in the third year of participation
• At least 6%, but not more than 10%, in any subsequent year of participation
Employer Contributions
100% vesting after no more than two years under either of the following two options:
Option 1: Matching contributions for nonhighly compensated employees (non-HCEs)* must equal 100% of elective deferrals up to 1% of compensation + 50% of elective deferrals of more than 1% up to 6% of compensation.
Option 2: Automatic employer contribution must equal 3% of compensation.
*Matching contribution rate for highly compensated employees (HCEs) can’t exceed matching contribution rate for automatically enrolled non-HCEs.
Reprinted with permission from The Tax Strategist, October 2009. For continuing advice on this and numerous other tax strategies, go to http://www.taxstrategist.net/. Receive 2 FREE Bonus reports and a 40% discount on The Tax Strategist when you use Promo Code WN0013. …
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