Episode 18 – Health Care Ate My 401(k)

Mike Stull (0:09)

Hi everyone, this is Mike Stull, your host for HR Benecast, your source for expert commentary and insights on current health benefits related news and strategies. We have two very special guests today, Rocke Blair from Hub International and Peggy West, Director of Compensation and Benefits at Formica. Rocke and Peggy, thanks for joining us today.

Maybe to start, could you give the audience just a quick introduction of yourselves?

Rocke Blair (0:36)

Certainly, Mike. My background is about 35 years in employee benefits, broken out between health and welfare services, working with middle to large market employers, and then also qualified retirement plans for the last 20 or so years working similar type market, primarily in the Midwest. Along with that, I have been involved in a number of different organizations, one of which we’ll talk about briefly during this podcast, and that is the Certified Employee Benefit Specialist Organization.

In fact, that’s how our other guest, Peggy West, and I met, was through that organization.

Peggy White (1:16)

And I’m Peggy West. I’m the Benefits Director for Formica Corporation.

I’ve been in benefits, gosh, for 30 plus years. Started out with a small local government, moved on to a couple of larger healthcare organizations, then for a brief time to a high-tech startup, and then on to manufacturing where I am today. Been with Formica for 13 years.

We’re a 100 plus year-old company. We have a little over 600 employees. Half of those are union employees.

I work mostly on benefits, including health and welfare, retirement, disability, absence tracking, also HRIS, using our HRIS to track benefits.

Mike Stull (2:05)

You’ve worked together on showing employers that while we typically treat health benefits and retirement benefits separately, they really are very much related in how you manage one can have a significant impact on the other. So let’s start our discussion by giving the audience some background on your work around this topic.

Rocke Blair (2:24)

Yeah, Mike, the work on this topic really began with Peggy and myself talking about how can we improve or raise the visibility and awareness of the CEBS designation, which is a Certified Employee Benefit Specialist designation that’s sponsored by International Society of Employee Benefit Specialists and the Wharton School. How can we raise the visibility of that designation so that employers, when given a choice in hiring for a benefits position, would choose a person with that designation as opposed to somebody without? And with that conversation, we talked about we do a great job with education and helping people understand the various benefits within a total rewards package. But the one thing that we’re missing is how do we take that and package it so that it helps solve business problems for the employer? And if employees can solve business problems for employers, they’re more valuable, it creates enterprise value, and therefore the employer be more likely to select that candidate and possibly at a higher compensation range than somebody without.

So that was the original genesis behind the work that we conducted.

Peggy White (3:35)

And then I would supplement that by saying, when Rocke and I were talking about that, I said, well, I have a business problem that we can look at. And with Formica, since I started, we had made lots of changes in benefits, but we still had one outstanding issue.

And this was an issue that was very important to our benefits committee as well as to our employees. And that is we have many employees that are past what I would call normal retirement age, anywhere from 62 to 65 years old, and they’re still working. They’re not retiring for various reasons.

And what became a priority for our organization is how do we persuade people to retire when their time has come, whether because they want to for their own personal desire, or their health isn’t as good as they would like it to be or for whatever reason. But our president just said, why aren’t people retiring anymore? Why are they still working and how does that impact us? So I brought that question up to Rocke and he said, hmm, I think we can look into that and maybe come up with some reasons and possibly some solutions.

Rocke Blair (4:55)

So Mike, from that, an idea was born and with a problem to solve, we set out with looking at the data.

Peggy was kind enough to share some de-identified data with me and we started running some different analytics and diagnostics and came up with some interesting results, some which we’ll talk about on this podcast.

Mike Stull (5:16)

Yeah, great. And I read through your article in the Benefits Quarterly magazine entitled Healthcare Ate My 401k Contributions.

And in that article, there were two startling statistics, at least to me. First, that average healthcare costs could exceed average household income by 2033, given the current growth rate. And when you think of 2033, you think, wow, that’s way out in the future.

No, not so much. That’s a decade from now. So that was a very startling statistic.

And then second, that up to one quarter of the money we spend on healthcare is wasted. So again, when we talk about average healthcare costs exceeding average household income, I think that’s something that just from a sustainability, we’re already talking about how unsustainable healthcare is. That only puts a punctuation on that statement.

So how do you see employers changing or what changes do employers need to make in terms of their health benefit plans?

Rocke Blair (6:28)

Yeah, let me jump in and add to that. And that statement you just read, that’s come from a number of different outside sources, but Peggy and I were able to really validate that some of the work that we had done, she had mentioned that people within the organization were unable to retire. But as you started looking at the demographics and started looking at the data, we realized that a high percentage of their paycheck was going toward healthcare.

And healthcare was squeezing out the family budget and did not allow for other expenditures. And sometimes 401k retirement savings considered to be discretionary expenditures and people just weren’t putting enough away and for a number of reasons, and they were short selling themselves on their ability to retire. And therefore, when the day came to retire, they were unable to because the savings just weren’t there.

So the statistic that you mentioned, that actually comes from the Annals of Family Medicine Journal. And if you use the 7% medical trend number, which is a common number that Kaiser uses, or even the Mercer Organization uses. And right now the average cost of healthcare nationally according to Kaiser is about $20,000 a year, which by the way, is about the same cost as a Honda Civic.

If you can imagine giving your employees a Honda Civic every year that they work and then compound that at 7% over the next 14 years, you come up with about the average family income level, $58,000. So the problem was very real. We took it to one specific employer and started to validate that through some of the research that we had conducted.

Peggy White (7:59)

And Mike, I could see that in the data when we had several organizations offered to do some analyses of Formica’s data, half of our employees are over the age of 50. So as you can imagine, we’re a Midwest manufacturing company. The process of manufacturing is pretty much stand in place and do the same motion over and over because we manufacture large sheets of laminate.

Our employees, we could tell from the data, were suffering, a large number of employees suffering chronic illnesses, diabetes, COPD, heart issues, high cholesterol, and some of them, all of those combined. So a lot of comorbidity. We could see in our data that a significant number of individuals had those diseases, chronic diseases, and about 20% of them, as statistically you’re going to hear, were causing a great deal of the cost of our insurance.

But how could we manage that chronic disease issue? So, this is something that we saw in the data. We also had an analysis done by Johns Hopkins, and they said, look, if your chronic disease claims incurred doesn’t change over time, you’re going to go up a huge percentage over the next five years to where we’re getting close to unsustainable at that point in time. So how do we cover employees, but also encourage them to save for retirement? And the other point you made about waste, I thought this was startling myself.

In our data, we have most of our business in Ohio, in the Cincinnati area, but we have a fairly large distribution center in Indianapolis area. So we saw that there were a couple of hospital systems there that for routine tests, mammography, colonoscopy, they were charging huge amounts higher than even in the Cincinnati area. So, we were seeing maybe several thousand dollars for routine colonoscopy in that area versus maybe 250 to $600 in Cincinnati area.

And that’s where we were seeing, wait a minute, that’s all waste. Who’s watching that? What can we do about it? So that to me was absolutely shocking. And of course, I’m like a lot of people, how can they do this? Well, they can do it because that’s what they charge in that area.

So we had to look at both the waste and then the increasing, incrementally increasing cost of chronic disease and those types of illnesses as well.

Mike Stull (10:47)

Yeah, I always am amazed at some of the cost variation among diagnostic services. And I don’t think the average person understands the, why is or why are the costs different? So you talk about the idea that many employers thought by moving from a defined benefit to a defined contribution plan on the retirement side, that they had saved the direct cost difference between the two.

But what happened in reality is that there are a lot of indirect costs and unintended costs associated with this move. Could you talk some more about that?

Rocke Blair (11:26)

Yeah, Mike, let me jump in and talk big picture, then Peggy can certainly fill in specifics with her experience with her employer. But you think about how the total rewards spectrum has changed over the years.

Historically, certainly when I entered the workforce and folks before me entered the workforce, there were pension plans. And the way pension plans were designed, the employer pretty much designed it, the employer funded it, the employer invested the money, everybody was automatically eligible as of a certain date, and the employer determined the final benefit. So when age 65 came, most people took their benefit, and they left.

And also keep in mind, if the plan had excess funding, oftentimes the employer provided retiree medical. So people had what they needed to sustain themselves into retirement. Now we flip that around, and the 401k is the primary source of retirement income for most folks.

When by the way, historically, they’re meant to be a supplement, but now they are the program. And think about the contrast in design. Employees have to elect to get in, employees have to invest the money, employees have to determine the funding amount, employees then pretty much determine the benefit.

And guess what, when age 55 comes, age 60 comes, and they go to their advisor to ask if they can afford to retire, and they’re shocked and learned that no, they cannot because there’s not enough savings. And we wonder why. But we recognize that the national press says that employees are financially, emotionally, and nutritionally illiterate, but yet we give them the keys to the castle, and we wonder why it doesn’t work.

And they run the car into the ditch. It’s just people are not prepared or educationally or emotionally to deal with retirement savings. And we now know that looking at the work of various folks like Dr. Richard Thaler at the University of Chicago, who won Nobel Prize for his work in behavioral finance, whether people have PhDs or GEDs, they make the same mistakes when it comes to managing money because it tends to be an emotional experience as opposed to an intellectual experience.

And by giving them controls, they tend to make the opposite decisions than that they would. And certainly ones that an educated and experienced committee wouldn’t make in the case of a pension plan. But now if you have a thousand employees, you have a thousand pension plan owners who just really are not capable of managing their future.

So that’s the biggest thing that as a fundamental that we’ve run into. Now we’re starting to understand, and Peggy will get into this a little bit, she alluded to it the consequences to both the employee and the employer when those mistakes are made. We now have a term or lexicon in our industry called the aging workforce syndrome, AWS, which is exactly what Peggy just described.

And I’ll let her talk a little bit more about the direct impact to her employer and her employees now that they’re in a defined contribution world.

Peggy White (14:26)

And Mike, I will start out with a story about Formica. Several years ago, we did have a good old fashioned defined benefit pension plan.

And the plan for both the union and non-union employees was frozen back in the mid-90s to late 2000s. So definitely a closed group. And in those groups are all the employees that have been around forever.

So come 2017, we had the opportunity to terminate the pension plan. Lots of employers are doing the same thing. And we decided now’s the time.

Terminated the pension, gave the employees an easy way to roll that lump sum balance over into their 401k. So we come to the benefits committee meeting where we’re going to look at the results of the pension plan termination. And president of our company is excited.

He’s thinking, oh man, this really did a lot of good for people. It did. However, when we looked at all the rollovers into the 401k plan, the average balance is still, and this is for everyone in the plan, $76,000 at the end of 2018.

That’s really not going to sustain anyone for 30 years of retirement. It was disappointing, but I thought, well, gosh, think of where we came from. It was something like $50,000.

Now it’s $76,000. At least we have that. But then again, that’s part of the answer to why those employees are not retiring.

And president of our company said, well, what can we do? We’ve got to do something. Formica did initiate safe harbor plan last year and increased the match. But what do we do for those people who are really too late in their career to accrue a lot more? Couple that with doing our statistical analysis and looking at our claims, we were able to identify the higher cost employees and the difference in the cost of a person who’s around age 60 and over versus a new employee who’s only maybe 20, 30 years old, even with a spouse covered.

The difference in cost on an annual basis is something like $40,000. And if you multiply that by our population who should be retiring based on their age, that’s a lot of incremental cost. And by the way, we were not tracking that in the past.

This is the first time we actually sat down and looked at as a company, how much is that cost? Theoretically, you know, yeah, yeah, I think these people are costing us more. But now with that statistical analysis, we could tell they really were costing us more. And we didn’t even look at things like increased workers’ comp cases or disability or things like that.

So we knew just based on health claims alone, those people were costing us more money. And that to me was the hidden cost of getting rid of the DB plan. People did not have enough money to retire.

And by the way, they were incurring more and more and higher claims as they remain with us.

Mike Stull (17:32)

Great. You mentioned there about taking a look at the data.

And so could you talk a little bit about the role of data analytics as you looked at this issue and the idea you mentioned in the article about using the what we call or what you called the $1 theory in terms of future investments and benefits.

Rocke Blair (17:53)

Yeah, Mike, let me speak to the $1 theory. And what that really speaks to is an employer identifying within their total reward strategy, what really matters.

And what I mean by that, if you have $1 to spend, where do you put it to maximize the impact for employees’ lives and for the employer? A lot of organizations offer a lot of different programs for their benefit structure. Some are used; some are not used. Employees do gravitate to what works or fits best for them.

And oftentimes, money is spent on things that really don’t produce an ROI or produce higher engagement or productivity within the workforce. So being efficient with the spend and understanding what is the problem you’re trying to solve. If the problem you’re trying to solve is get people out the door on time and help them choose their day, well, you might want to allocate more money to asset accumulation programs so you introduce wealth into people’s lives and things like the HSA, FSAs in some cases, and certainly 401k and HRAs and things of that nature if that’s where the greatest need is.

If healthcare is stabilized, well, maybe keep that contribution where it is. And if there are additional assets to be used, repurpose those and put them into other areas that are going to produce greater value for the organization. So that’s the concept of the $1 theory.

You have $1. You can’t spend it on everything. So find the area that’s going to provide the highest and best impact to all involved.

Mike Stull (19:25)

Great. Peggy, anything to add there on the analytics?

Rocke Blair (19:31)

I think that it was a huge boon for Micah to actually look at the data. You can think you have problems, but until you quantify them, and you recognize them using your own data as a company, you really don’t know how much it’s costing you.

So I think the data is so important and it will tell you where your problems are if you look at it. But not everyone enjoys looking at all the data. It takes time.

You have to make sure you’re pulling the right information from your claims. You have to make sure you have access to all that claims data and that you can identify it based on gender and age. That was important.

Now, fortunately, I had that access through our TPA, and I was able to run the reports, but it certainly took me some time to make sure we got all the data. And it’s a huge, if you take a year’s claims data, it’s a lot of information. Then you have to have someone who’s going to analyze that for you.

And fortunately, that’s what I had as part of this project. I think it’s extremely important. Look at what you’re actually spending and where you’re actually spending it and identify those problems.

You can’t solve all your problems at once, but it’s better to identify problems that are really hot, hot, hot, that are red hot and need attention right now, especially if you can give those problems some attention right now and hope that they pay off over time or even things that need solving like right now. How can you do that? And then when you know what you’re spending, and if it’s not where you want to spend your money, then you look at that dollar that Rocke was talking about. Wait a minute, I want to take more of that dollar and put it toward retirement.

How can I manage that looking at my health care data?

Mike Stull (21:22)

Great. Awesome. So if you had to provide employers listening with one or two action steps after listening to this conversation, what would they do?

Rocke Blair (21:31)

Mike, let me jump in and give you high level things that Peggy and I talked about.

Number one, what’s your people strategy? And what I mean by that is what are you trying to reward? Engagement, productivity, and if those are the things you want to reward, does your total reward system optimize the impact for those behaviors? It amazes me, oftentimes I talk to employers, and I ask them how much they spend on benefits, and they give me the number. And now I ask them, well, how’d you come up with that number? And they will say, well, that’s what we budget or that’s what our industry does. And so again, what is the problem you’re trying to solve? And so my point is, until you know the destination, you really don’t know how much you need to spend because you can reverse engineer from the destination to current day to understand what the benefit needs are and come up with a budget.

I submit that most employers probably overspend than what they need for their total rewards program because they’re not being as efficient and doing some things that Peggy talked about with the $1 theory. So really understand what’s important to your folks so you can change the discussion to be about people and engagement with benefits being secondary because people will find the benefit that best fits. And then with that, on process, the three things that matter is health, wealth, and time for employees.

So think about, again, who are the people within your organization? Because nowadays we can have up to five, six, or seven different generations in one workplace population. And what somebody in Generation Z wants versus say somebody in the silent generation or the baby boomer generation can be completely different. And some of the work that we’ve done within our own organization, folks just come into the workplace oftentimes around their parents’ health care program.

They’re more interested in paid time off, pet insurance, and the culture of the organization and work-related activities, where somebody who’s older and phasing into retirement, probably more interested in retiring medical. But yet we have a one-size-fits-all benefit program that maybe doesn’t really fit anybody because it doesn’t really speak to where they are in their career and where they are within pay structure, geographic locations, a lot of different things that determine what their particular needs are. And then finally, is the technology aligned with delivering the things we just talked about? Not just data mining and analytics, but are we making benefits easier for folks to understand? I use an example.

My daughter entered the workforce about five years ago and went to work as a teacher of a middle school, public middle school. And here she was 22 years old and she brought home, we in the benefits area sometimes call it the tower of terror, which is a stack of brochures, folders, handouts, et cetera, that had her 4-3B program in it, had her pension program in it, had her dental, had her FSA, had all these things. She just graduated college three months ago and she was expected to digest all this.

And there’s just no continuity in understanding how someone new to the workforce would understand how to use that. There’s now some technology available that makes those types of benefit decision-making more user-friendly for organizations. But then even going back to the comment I made about behavioral finance, just restructuring plan designs and terminology and the layout of information to make it easier for the average person to understand, make it more consumer-friendly invites greater engagement into the benefit program.

So there are things that we can do that would appeal to the masses and make things easier to understand and more consumer-friendly that technology now affords.

Peggy White (25:17)

I would agree with that completely, Rocke. I think it is looking at your audience of employees and looking at the variety of needs that they have.

So Formica has a population that’s preparing for retirement, close to retirement, at retirement age. And that’s certainly different from the employees that we’re bringing in who are younger and just want to know, again, can I get my help with my student loans? If I want to further my education, do you have tuition assistance? That kind of thing. And I think for a company like Formica, what we could do is focus more on education.

After that first day when we get somebody in employee orientation, we are, as HR, we’re so delighted to have them in one room for a couple of hours where we can flood them with all this information. Sort of like, hey, I know you’re only 25 now, but when you’re 50, you’re going to care about this, so don’t forget it. And then the education kind of stops unless we get occasional meetings.

So I think focusing more on education, particularly now for our more retirement age folks, have they really thought about how much it’s going to cost in retirement and the resources they have? Then for our pre-retirement folks, how do you plan for those resources? So maybe some financial education so people understand what they need and how to get there. And then a more specialized approach to benefits at every age. What’s important to one person is not important to another.

And then look at your data. That’s what I would definitely recommend for any organization. Look at your data now.

See where your people are, where you’re incurring the costs, and is that where you want to spend your money?

Mike Stull (27:02)

Great. Well, thank you both for those insightful comments. And again, I really enjoyed reading the the article that you put together.

And as you mentioned data, there are a lot of data points in there that are fascinating to look at. So we’ll make sure we put a link to the article in the notes. So any last words, anything we didn’t cover?

Rocke Blair (27:31)

Mike, one thing I probably should know because we’ve really not spoken to it, but it was pretty evident in the article you just referenced.

That is the ability to quantify the hidden cost of a workforce. That’s one of the first things that Peggy and I did with her workforce. In the old days when there were pension plans around, and there still are, I’m dating myself here, an actuary’s sign-off was required to validate that all the assumptions and the calculations of the liabilities were accurate.

Well, in a 401k world, that doesn’t apply, but it doesn’t mean those liabilities don’t exist. They do. We just never really measured them before.

Now using various technologies, we have the ability to come up with a pretty precise calculation of what the human capital liability is for an employer. And we know that if employees do not retire on time, just like Peggy talked about, certain illnesses and degradation of people’s abilities to work as employees occur. And there’s a cost for that.

And it may not be something that shows up directly on an income statement, but it’s something we can now quantify for an employer and show them that here is the cost of the workforce. It’s going to manifest itself in the form of absenteeism, presenteeism. It could be slips, trips, and falls, safety, you name it, it’s there.

And now that we have measured it, and this is the thing Peggy and I did, once we saw the number, we said, all right, now we understand there’s a problem. And now we’re able to dig into the particular cost drivers to help solve that problem. So that’s new for our industry because before it was out of sight, out of mind, but now we bring it to the surface.

Once you measure it, you can fix it.

Peggy White (29:15)

And I would like to add too, as Rocke said at the beginning, he and I met, and we were active in our local ISCEBS chapter. I’m a CEBS, I’m a fellow, ISCEBS fellow, so that means I’m really truly interested in benefits and focused on it.

Not many companies the size of Formica have a benefits director on staff who’s also a CEBS, and it’s all geeky about benefits data, like me. So they need a company. If you don’t have that on your staff, you can go to your broker and consultant, and that’s a good resource, but they may not get deep enough into the issue as deep as the employer wants to get.

So, seek qualified help to get a look at your data.

Mike Stull (30:01)

With the keyword being qualified.

Peggy White (30:05)

Yes.

Mike Stull (30:06)

All right. Well, thank you, Peggy and Rocke.

Appreciate you joining us today.

Rocke Blair (30:10)

Thank you.

Mike Stull (30:11)

If you haven’t had a chance to attend our new virtual summer benefits camp series, there’s still time.

Our next webinar is August 27th and features the Employers Health clinical team as they share the impact of custom utilization management programs. Visit the Employers Health web page and events page to register. And if you’ve missed the earlier webinars in this series, check out the missed it section on the events page where you can find a link to the previous webinar recordings.

Another exciting event, hiking the trail of employee engagement on August 12th, brings you tips to engage employees and their overall health and benefits during a global pandemic. And finally, if you haven’t already joined us at a virtual sightlines event, join us August 18th where you’ll gain valuable insight into ways to maximize your organization’s benefits plan while gaining insight around PBM trends. From Sam Shalala, director of business development, and Jay Withee, director of client solutions here at Employes Health.

Before we close, I want to share the keyword for this month’s episode and congratulate the last episode’s winner, Doreen Hall from Midwest Public Risk. Doreen will receive a $50 gift card for correctly submitting the keyword questions. Congratulations, Doreen.

The keyword for this month’s episode is retirement. So if you’d like to be considered for the $50 gift card, please submit the word retirement along with your name and email address and any questions using the link on the landing page. There’s always something new at Employers Health, so be sure to follow us on LinkedIn or Twitter to stay up to date.

Again, don’t forget to submit your questions by completing the field on the landing page or clicking the link titled submit your questions here. And be sure to tune in to an upcoming episode to hear the answers to your questions. That will conclude this month’s episode.

Thank you again to Rocke and Peggy for not only sharing their insights with us, but for working proactively for their planned participants and advocating on their behalf.

And thank you for taking the time to listen. But more importantly, thank you for your continued membership and participation and interest in Employers Health.

Again, don’t forget to submit your questions so we can answer them in an upcoming edition of the podcast.

Be well, and we’ll see you soon. Bye.