Maintaining A Healthy Flow

Dallas Salisbury is president and CEO of Employee Benefit Research Institute and chairman of American Savings Educational Council, a national coalition of public- and private-sector institutions committed to making saving and retirement planning a priority for all Americans. ASEC partners collaborate on financial security initiatives that include national educational and public service campaigns, fact sheets, and retirement planning worksheets and calculators. ASEC educational materials are available at www.choosetosave.org.

What is the biggest challenge for higher education institutions with regard to ensuring employee financial preparedness?

Salisbury: A critical challenge facing colleges and universities is managing employee transition into retirement. One component of that relates to health-care expenses and whether individuals who would like to retire prior to Medicare eligibility are able to do so. This will depend in large part on what is available to them in the way of supplemental health coverage and how affordable that may be. The strategic question any enterprise must first answer is: What is our role in the marketplace relative to workforce flow?

For instance, is your objective to get people to a point where they are able to retire with adequate incomes and health coverage by a particular age—perhaps by age 66 when they are then eligible for full Social Security and Medicare? Once you identify your objective, the next question centers on what this will require of the organization and of the individual.

Are there specific considerations for colleges and universities?

Salisbury: There are many sub-objectives to sort out for higher education institutions. For instance, you may determine that age 66 is the desired end point. Yet, if you hired someone at full professor at age 50, do you believe you have an obligation to get that individual to adequacy at age 66 relative to the faculty member you hired at age at 25 who has been with the institution for 41 years? You may decide that you want to provide adequacy to 60 percent income replacement for those with 35 years of service—with a cap at that percentage so that the person with 41 years of service still gets only 60 percent replacement—versus 27 percent income replacement for the person you hired at age 50, based on adjustments for time of service. Or you may decide your objective is to provide the same level of income replacement for all faculty no matter when you hired them. All this is relevant to a defined benefit plan sponsor.

It becomes more complicated for the institution that sponsors a defined contribution plan only. What if the person you hire at 50 comes from outside higher education and had no savings? How much would the employer and the employee have to contribute to get to adequacy after 16 years? The chief business officer can play a central role in the cost analysis and income projections of alternatives. Then, whatever the objective, it's the primary role of the CBO to help the institution determine how to pay for that.

How do institutions balance the significant cost implications of making sure employees are ready to retire?

Salisbury: For too many organizations, what has frequently come into play during the past 10 years is far greater focus on making changes based on a desire to spend less. Private-sector employers have spent years redesigning retirement programs to match a cost target almost without reference to what level of financial preparation this will give someone. In this way, the strategy itself becomes one of spending less as opposed to achieving specific objectives surrounding workforce exit or income and health-care security, and then figuring out how to finance those objectives. This has begun to change a bit in the past two years, and I expect it will change more in the years ahead as more workers decide they cannot afford to retire and private employers find that they have workforce management problems. The Supreme Court, for example, recently tightened again on the age discrimination front.

In general, higher education has continued to contribute far more than has been the pattern in the past 10 to 15 years in the private sector. Yet, with all the changes in accounting standards and increasing health-care costs, I think we're seeing more higher education institutions turn to these cost-driven and liability-driven scenarios as opposed to focusing first on workforce objectives. The key going forward will be to stay focused on strategy and maintain a holistic view of balancing financial and workforce objectives as opposed to getting drawn into a mentality of cost reduction without regard for long-term consequences. While you can always decide to spend a lot of money at some future point in time to encourage employees to move on, very frequently when in a period of economic decline as we are now, that is tough to do.

Unfortunately, for some colleges and universities, boards may be the culprit for pushing an institution to stop being strategic and start being a copycat. If you have a number of private-sector trustees, they may say, "We don't do that in our company," or "The private sector stopped doing that 10 years ago, so why are you spending so much?" This creates a pressure for institutions to follow what everyone else is doing, and these days, every sector seems locked into a cycle of looking at a shorter and shorter time frame and viewing things increasingly in terms of immediate expense and immediate effect. It is incumbent on chief business and human resource officers and institution presidents to focus strategically and present the rationale for how cutting costs now may present huge problems down the line relative to the institution's workforce management goals of getting people to a level of preparation at which they can voluntarily leave.

How can institutions stay focused on their workforce management goals?

Salisbury: If an institution wants to be strategic about this issue, its leaders must set aside cost considerations for the moment and first ask what they want to achieve and what role the institution must play. Once you determine your objectives, plan design becomes clearer. That's not to say there won't be tough decisions about the possibility of having to spend a larger percentage of compensation on benefits than do some of your competitors, or of requiring employee contributions rather than making these voluntary. The latter is always unpopular, since in general, telling employees they must do something tends to produce kickback. But it's really a question of what is your foremost objective. If it's to get employees to a point of retirement readiness based on when the institution wants them to retire, then you have to be prepared to make difficult choices. Clear articulation of objectives and the changes needed to finance those objectives must be addressed head-on if you want to take a strategic long-term approach to managing your workforce.

Are there additional challenges for the higher education sector?

Salisbury: Within higher education, this formula becomes more complex because workforce needs are also impacted by what happens to student enrollment trends. The demographics are pretty clear about the pool of college-age individuals for the next 20 years. What may vary is assumptions regarding how many of those will go to college. In theory, an institution can do a reasonable job of estimating future enrollment. What is harder to guesstimate is in which specific areas institutions may need fewer faculty, or to predict when faculty may voluntarily leave compared to when you may want them to leave. The challenge of managing to slower enrollment growth or to the potential of decline will present tough challenges for human resource and finance officers.

All this becomes even more difficult for small institutions because the issue of affordability hits smaller entities in more real terms. Different strategies may be required, such as an annuity-only philosophy to ensure that you always have the maximum amount of money in your plan, or to establish higher contribution rates and to plan to always be overfunded, or to take a more conservative investment approach to mitigate the effects of market swings.

Regardless of institution type, every college and university must also grapple with the question of balance between what kind of plan the individual may want versus putting a plan in place with the best likelihood of providing the certainty of outcome the institution needs. Ultimately, whether public or private sector, institutions must make decisions about what benefit program best serves the interests of the institution, following objectives that produce that end result.

What is the role of the chief business officer?

Salisbury: The CBO should work in tandem with his or her human resources officer to push the institution to clarify what it wants to achieve and then force articulation of institutional objectives geared toward those goals. Then it becomes a matter of analyzing the most cost-effective way to get from point A to point B, factoring in what level of participation can realistically be expected or required of employees.

This discussion takes on similar qualities of the cost objectives and considerations regarding an institution's health-care benefits. Some companies have been very careful in the way they have moved to lower-cost, higher-deductible plans by making up-front payments for wellness and prevention and disease management. They've done the research and know about the long-term expenses associated with employees who have to pay for preventive care, since many won't do so and will therefore require more expensive treatment further down the road.

The employer that isn't careful and settles for a low-cost plan without regard to funding wellness and prevention will end up with employees who are less healthy and less productive, because the focus was on cutting immediate costs and not on avoiding longer-term costs and the resulting negative effects on workforce health and productivity. High-performing institutions start with the goals of presenteeism and productivity and then determine what kind of health-care program will get them there. Managing your workforce so that employees can make a financially healthy transition into retirement must embrace this same approach of starting with the end goal in mind.