HR in an Age of Political Uncertainty
| According to Dallas Salisbury, president and chief executive officer of Employee Benefit Research Institute (www.ebri.org), Washington, D.C., U.S. colleges and universities face true challenges ahead with analyzing the implications of health-care reform and staying abreast of likely changes forthcoming to employee retirement programs. In this interview, Salisbury discusses where institution leaders can best focus attention on these matters in the context of an uncertain political landscape. |
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| Dallas Salisbury |
See also past articles contributed by Salisbury, including "Automatic Diversification" in the July 2009 HR Horizons, covering the advantage of target date funds for employer defined contribution plans, and "Does Higher Education Need Retirement Plan Overhaul?" in the July 2006 HR Horizons.
Where should colleges and universities focus attention right now with regard to health-care reform?
Especially in this period of political uncertainty, I would argue for employers to focus on only those portions of the (Patient Protection and Affordable Care Act) law that they must implement at present. The beauty of this law is that the Web site (www.healthcare.gov) created by the Department of Health and Human Services provides continuous updates on what to do and by what date. This is the first major human resources-related legislation that details enactment of the law within an Internet-based arena, and that makes it easier than at any time in history to know what an organization must track and must do to comply.
What do you mean by current political uncertainty?
I am referring to the potential impacts of the 2012 elections. Let's assume the Republican party maintains control of the House and picks up a majority of seats in the Senate. Regardless of whether President Obama is reelected, the Republicans have made it clear that, with control of both houses, they would try to repeal key parts of the health-care reform law. And if Obama is defeated, the Republicans will view this as a mandate to repeal even more of the law. So, while some employers are eager to move forward with reform measures, what I'm suggesting is that it is most prudent for institution leaders to consider which parts of the law they must implement prior to 2013. Any time and money spent beyond what is required would be worthwhile only if the law remains in effect beyond 2013, and that remains to be seen.
You've spoken often about the transition from defined benefit to defined contribution plans. What are the key drivers behind this transition?
We continue to see movement by organizations in all sectors away from defined benefit plans and retiree medical benefits. In essence, higher education is following other sectors toward defined contribution approaches that allow for budgeting of costs in advance. This is also an attempt to avoid the volatility in payouts resulting from interest-rate changes and market fluctuations. As operating budgets tighten, organizations are finding it increasingly more difficult to pull money from other programs to meet unanticipated expenses like defined benefit pension contributions.
Some colleges and universities have never offered defined benefit plans, but those that have or that still do have found them to be a beneficial tool for encouraging people to stay or to exit the institution. By contrast, defined contribution plans tend to place power in the hands of individuals to work for as little time or as long as they like. For many sectors for many years, the human resource value of the defined benefit plan was enough to compel the enterprise to keep the plan. Yet, in this era of declining resources, the need to calculate and control costs in the short term overrules the long-term value of more effectively managing an institution's labor force.
In addition to cost pressures for employers, the rise of defined contribution plans has been driven in part by employees, who are drawn to the flexibility of investment choices and the portability of these plans, even if defined contribution plans don't always result in a better savings vehicle for the individual over the long term.
What implications does this shift from defined benefit to defined contribution plans carry for employers?
One outcome is a higher rate of turnover among employees that employers must come to accept. With defined benefit plans, for which the payouts are based in part on length of service, changing jobs can be costly for an employee. In the absence of a defined benefit program, there is greater freedom for workers to consider switching employers because there is less for them to forfeit in doing so. This is as true for employees who are 20 years into a career at your institution as it is for new recruits.
The same dynamic holds true with regard to retiree medical benefits. As employers move away from offering retirement medical benefits toward individual account and capital accumulation programs, for instance, this too will encourage worker mobility and increase the likelihood that some of your most valuable mid-career employees will find it easier to leave if they discover better opportunities elsewhere. That puts added pressure on employers to effectively manage employee performance and to find ways to keep their best talent motivated and engaged.
As has been the case within the private sector, an increasingly smaller number of colleges and universities—predominantly independent institutions—will be able to withstand interest rate and investment return volatility and maintain sufficient financial reserves to retain their defined benefit and retiree medical programs. Those that can hold on to these programs will have an attractive recruitment and retention tool, with the following caveat: They will have to convince current and prospective employees that the institution will keep these benefits, since most surveys indicate that trust in organizations and institutions of all types continues to go south.
What do you see as the potential impacts to higher education benefits programs as a result of legislative developments that might still transpire during the current session of Congress?
First, we need to step back. Where we as a nation and as organizations have gotten into trouble with our health-care and retirement program development in particular is by continuing to base our planning on highly optimistic assumptions. The assumption that health-care inflation wouldn't last year after year meant that we weren't as proactive as we should have been or as early as we could have been with designing programs focused on wellness and prevention. Or, if instead of assuming a consistent 10 percent or greater annual increase in our investment portfolios we had projected a more modest 4 percent annual rate of return, fewer of us would be operating in crisis mode at present. When we continue to maintain overly optimistic assumptions, we guarantee the need for crisis management. The transition from any bubble is a very painful one. It is a slow process and requires everyone to get used to what lower growth rates mean in their everyday lives. This gets defined by many as austerity, and austerity is never popular, but it is part of the current reality. And that new reality provides a different basis on which to hire and invest and provide employee benefits.
To add further insult, many within Congress continue to assume this current stagnation is nothing more than a short period of turmoil and that we are going to soon return to our previous trend lines of growth. I don't sense that too many public policy makers have yet internalized the tough decisions we need to make or how quickly we need to do so. Federal budget decisions and workforce decisions at the state and local levels and really by enterprises of all types are being deferred in hopes that we will get back to the 1990s heyday as opposed to recognizing that this is the new world we have to deal with and that we must get on with it quickly.
The next test of whether we get it will come very soon. If we assume that the Super Committee (the Joint Select Committee on Deficit Reduction) fails to come up with any deficit-reducing solution and in fact we see significant cuts to programs like defense and health care, we'll see a lot of corresponding cuts to research funding for higher education institutions. Most growth to higher education institutions in recent years has been in research dollars. With what by all accounts seems to be continued challenges ahead for many state and local governments, any money coming to institutions either directly or indirectly from state or federal governments now carries a big question mark on it. This is true not only for the short term. Mid-year review documentation from the Congressional Budget Office shows growth estimates that are daunting for decades to come.
Any projections for what else may be in store in the next legislative session?
In September, EBRI presented testimony to the U.S. Senate Finance Committee where the main focus of the hearing was the elimination of pretax contributions to any retirement program other than a defined benefit plan. Under this proposal, any employer contributions would be immediately taxed. Both parties view this as indicative of the kind of tax change necessary for Congress to enact during the next several years to deal with the nation's slow growth and high unemployment. No one knows when these changes will take shape. It's a safe bet that nothing will happen this year or the better part of next year due in large part to the 2012 elections, but such changes could come as early as 2013 or 2014. What I can say with confidence is that this tax reform-focused environment will persist regardless of who is in office. The kind of changes coming in federal tax policy and tax law will present an intriguing set of challenges for all sectors, most certainly including higher education. So, we all need to stay tuned for that.
Karla Hignite, principal of KH Communication, is editor of NACUBO's HR Horizons. E-mail: karlahignite@msn.com.
