Lessons of 401(k) plans for health care
Lessons From the Evolution of 401(k) Retirement Plans for Increased Consumerism in Health Care: An Application of Behavioral Research
By Jodi DiCenzo and Paul Fronstin
Employee Benefit Research Institute (EBRI)
August 2008
Retirement and health benefits following a similar evolution:
The private sector’s shift away from “traditional” company-financed pension plans toward individual 401(k) accounts illustrates how benefit decision-making and responsibility have shifted from the employer to the worker. The current trend in health care design toward “consumer-driven” health plans illustrates the same trend with health benefits.
Health plan design is encountering the same obstacles as 401(k)s did:
Efforts to make workers more involved and responsible for their health benefits have run into the same problems that 401(k) plans did: Workers tend to delay or be disengaged from both retirement and health care decisions, these issues require long-term planning, and workers see both retirement and health care decisions as complex and difficult.
Among the behavioral lessons learned from retirement plans:
- More choice is not always better: Behavioral research, particularly with 401(k) retirement plans, has shown that increased choice can have negative consequences: More is not always better and may even be worse in some cases. Many people remain disengaged from matters they do not have an immediate need to address, and by the time the need becomes immediate, it is often too late. 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: Research has shown that education has resulted in little to no improvement in workers’ knowledge of retirement saving and investing. In addition, empirical evidence suggests that even when “educated” employees know, most of them fail to act on their knowledge. The heavy investment that many employers have made in retirement education and information programs often fails to produce the desired results.
- Financial incentives don’t always work: Financial incentives, such as an employer match in a 401(k) plan and tax breaks, also fall short of motivating optimal behaviors. Despite the tax-favored status of contributions and the existence of employer matching contributions, a significant portion of eligible workers still do not contribute to a 401(k) plan.
http://www.ebri.org/pdf/briefspdf/EBRI_IB_08-2008.pdf
Comment:
By Don McCanne, MD
The theme of this report is that lessons can be learned from the behavior of employees regarding their individual 401(k) retirement plans that can be applied to their participation in consumer-driven health plans, but the importance of these observations is far greater than merely providing suggestions to “nudge” employees into these programs. The behavioral observations are precisely those that would be anticipated in programs that are designed to shift the responsibility for retirement and health security from the employer to the individual.
Traditionally many employers provided generous health and retirement benefits to their employees. Participation was automatic and was welcomed by the employees as part of their employment compensation packages.
Once employers became concerned about the costs of these programs, they responded by shifting the responsibilities to the individual employees. First the traditional pension plans were shifted to individual 401(k) plans, and now health plans are being shifted to consumer-driven plans, especially health savings accounts or health reimbursement arrangements coupled with a high-deductible health plan. As the authors state, the decisions required tend to be complex and difficult, which tend to delay or disengage the employee from these decisions.
Compare this with Medicare and Social Security. These are retirement and health benefit programs in which enrollment is automatic, and with benefits that are so popular every politician has learned not to touch this third rail.
Employers should be relieved of their responsibility to develop and manage these programs, but placing that responsibility in the hands of each individual would be disastrous. With a median household income of $50,000 most simply cannot afford either adequate health benefit plans or retirement income security. A new study by Elizabeth Warren reveals that this is already at a crisis level - personal bankruptcy for retirees has skyrocketed.
The missing ingredient is social solidarity. Through social insurance programs we could all have both health security and retirement security that is completely automatic. We already have the money. But solidarity? That doesn’t take money; that takes will.