Employee Fun Factor and the Bottom Line

This first Monday in September finds millions of Americans and Canadians celebrating Labor Day 2016 with a day off from work or school. For some it marks the end of summer and a return to "no play" for awhile. Smart employers know otherwise and are implementing policies to encourage playtime at the office or plant as a way to boost productivity, encourage innovation and lower healthcare costs.

According to business executive Paul Harris, implementing play at work policies can be challenging, in part due to gender and age differences. Drawing from recent survey results, he explains that "While 51% of 16-24 year olds would like allocated 'fun time' at work, this drops to just 19% for 55-60 year olds." The good news is that certain activities such as shared birthday celebrations or board games appeal to broad groups and ought not to be overlooked by employers. Read "Why it pays to play: workplace fun breeds employee wellbeing and productivity" (HR Magazine, April 12, 2016).

Snack Nation, a commercial delivery service, has a snappy visual on its blog entitled "11 Shocking Employee Happiness Statistics That Will Blow Your Mind." Citing research from organizations such as Gallup, they reference greater sales, employee engagement and fewer sick days as some of the positives associated with workplace improvements. NPR extols the virtues of adult recess and Today Money highlights why big companies, "not just startups" are focused on fun at work. The National Institute for Play consults with business leaders who want "to more effectively access innovation in their operations," asserting that "science already provides data to show that playful ways of work lead to more creative, adaptable workers and teams."

Mark Schiff, a dentist friend of mine, credits his success as an award-winning painter in part to an ability and willingness to embrace his inner child and freely express himself. My husband, one of the hardest working people I know, regularly takes time to play. (He's a keen competitor in Scrabble.) I've attended lots of business development workshops that include seemingly silly exercises designed to encourage adults to think outside the box as a way to advance goals.

I love these words from Thomas A. Edison, inventor extraordinaire. I hope you do too: "I never did a day's work in my life. It was all fun."

Reading Books For Longevity?

In celebration of National Book Lovers Day, it's worth noting that some scientists are extolling the virtues of words for good health. According to "Reading books could increase lifespan" by Honor Whiteman (Medical News Today, August 8, 2016), a new analysis suggests that regular readers have a greater chance of survival compared to those who use their time for other activities.

Utilizing Health and Retirement Study data for nearly 4,000 American adults, Yale professor Becca R. Levy, with Avni Bavishi and Martin David Slade found that "Books are protective regardless of gender, wealth, education or health" and "... are more advantageous for survival than newspapers and magazines in terms of cognitive benefits. (Click to purchase "A chapter a day: Association of book reading with longevity," Social Science & Medicine, Elsevier Ltd., September 2016.)

For bibliophiles everywhere, this discovery is good news indeed, assuming that their results apply to the population at large. 

Retirement FinTech Gets Another Suitor - Goldman Sachs

No sooner had I written "Financial Technology and the Fiduciary Rule," an invitation to the Future of Finance 2016 appeared in my in-box with the call-out that "Technology is about to revolutionise financial services." (Note the British spelling for this Oxford conference.) Based on session titles, attendees will hear about topics such as how technology can:

  • Be "used to build trusting relationships with clients" and increase transparency;
  • Substitute for "expensive human intermediaries" to lower costs; and
  • Encourage the creation of "simpler and cheaper" insurance and savings products.

Increasingly, angels and venture capitalists are waking up to the fact that the global retirement marketplace is big and ripe for innovation. Earlier today, Goldman Sachs Investment Management Division announced its intent to acquire Honest Dollar. According to CrunchBase, this transaction follows a seed financing last fall to further build a web and mobile platform that allows small businesses to cost-effectively set up retirement plans. Expansive Ventures led that round that includes former Citigroup CEO Vikram Pandit and will.i.am, founder of The Black Eyed Peas musical group.

Yet another indication that investors see "gold in them thar health care and retirement plan hills" is a $30 million capital raise for a company called Namely. Its February 23, 2016 press release lists Sequoia Capital as the lead venture capital firm for this round, bringing its total funding so far to $107.8 million for this "SaaS HR platform for mid-market companies."

Interestingly, in articles about both Honest Dollar and Namely, the tsunami of complex regulations is cited as a reason why employers need help from financial technology organizations. With mandates growing and becoming more muscular, no one should be surprised if cash-rich backers write big checks to financial technology businesses. As Xconomy reporter Angela Shah points out, multiple start-ups are "trying to compete for the 80-plus percent who don't offer benefits."

There is no doubt that the competitive landscape is changing and will prompt more strategic soul-searching for vendors and policy-makers alike. I've listed a few of the many questions in search of answers as things evolve.

  • Will other large financial service organizations like Goldman Sachs swallow up smaller start-ups? If so, does that change the role of angels and venture capitalists?
  • If enough of these companies pop up to serve small businesses and self-employed persons, is there still a need for the product offered by the U.S. government - myRA?
  • Will the U.S. Department of Labor fiduciary rule, if passed into law, accelerate the formation and growth of financial technology companies? If so, how?
  • Will there be a need for more or fewer financial advisors as the financial technology sector grows?
  • Will individuals buy more insurance and savings products? If not, why not?

Life in financial services land will never be dull.

National Doughnut Day and Retirement Plans

In case you didn't know, today is National Doughnut Day. According to ABC News, Cumberland Farms and Krispy Kreme are a few of the sellers that are giving out freebies in celebration of this longstanding holiday. In its May 28, 2015 press release, Dunkin' Donuts (another participating retailer) informs that the holiday has been around since 1938, having been created "to honor women who served donuts to soldiers during World War I." The history of this sweet treat goes back even further. Smithsonian Magazine chronicles the popularity of the doughnut, citing its introduction to Americans by the Dutch when Manhattan was called New Amsterdam. Since then, sales have soared with 2012 doughnut store revenue reported at $11.6 billion.

Presumably free doughnuts generate sales of other products like coffee or tea and that is one motivation for holiday largesse. Another motivation for giving things away has to do with product branding. The Chief Marketing Officer Council website touts a 2015 global estimate of $540 billion as the amount that companies expect to spend on advertising. I experienced this firsthand when I recently spoke at the Government Finance Officers Association annual conference. Before my session, I perused some of the booths in the exhibition hall. I now have stress balls, pens and tote bags that sponsors gave away in droves to ensure continued name recognition. Two days ago, the subject of branding came up again when I met with the general counsel of a large financial institution. He specifically used the term "building the brand" when describing transparency and good governance as a way to differentiate his firm's offerings to pension funds, endowments and family offices.

This got me thinking about benefits that employers offer to attract new employees and retain existing talent. Jen Schramm writes about a 2014 survey in "Which Benefits Attract Highly Skilled Workers?" (Society for Human Resource Management, April 1, 2015), stating that health care, retirement and leave arrangements "were the top benefits used to retain employees at all levels of an organization." This finding leads to logical questions about (a) how employers are branding the benefits offered in seeking to fill jobs and (b) whether only well-funded and viable plan benefits get promoted to newcomers and existing workers.

Understanding some basics about branding helps. Mark Di Somma recently addressed the seven R's of a powerful branding strategy to include the following:

  • Resonance - Does a brand "talk to people's needs in ways that feel personal, relevant and wonderful?"
  • Resilience - Does the brand create a competitive advantage?
  • Results - Will the brand add to the bottom line?
  • Resolution - Is the brand inspiring and "Does it align with the vision and the purpose?"
  • Radiation - Will the brand generate positive conversations?
  • Redefinition - Does the brand dazzle or simply move the deck chairs around?
  • Recognition - Does a brand build on what customers (in my example, employees and prospects) already know?

His points can be applied to the offering of various benefits and related communications with participants. Based on my experience as a forensic economist, numerous cases on which I have worked in the last few years allege poor communications and rescinded benefits (even when perception differs from reality). In brand parlance, this means there is low resonance, low resilience and low resolution. Participants do not feel that the benefits meet their needs. Increased costs relating to factors such as longevity are reducing the bottom line and forcing lots of companies to rethink whether certain benefit programs should be maintained. Underfunded and badly managed benefits can lead to negative "radiation" as reflected in the growth of putative ERISA class actions with multiple disgruntled employees willing to serve as plaintiffs.

The topic of benefits "branding" (i.e. using benefits to attract and retain talent as a way to create enterprise value) is far from trivial. Companies throughout the world are seeking to balance the costs of offering benefits against the hope that a generous HR mix helps shareholders too. It is certainly food for thought, in between bites, for those who plan to munch on a free doughnut today.

X Marks The Spot Approach to Pension Risk Management

Anyone who has been on the receiving end of major surgery may tremble after reading "How to Make Surgery Safer" (Wall Street Journal, February 16, 2015). Journalist Laura Landro describes a panoply of horribles such as operating on the wrong body part or leaving a foreign object inside a patient's body. Honing in on "never events" (i.e. those that are serious and should never occur), she describes attempts by hospitals to reduce human error in a quest to contain the rate of injury, minimize the number of deaths and avoid the billion dollar whack for serious faux pas. Besides the collection and analysis of big data to glean lessons learned and track performance, the writer describes how operating room teams are being prepped to emphasize safety in numerous ways. These include, but are not limited to, the following:

  • Adding radio frequency tags to instruments and sponges;
  • Empowering nurses to override a doctor's orders to wrap up if questions exist about missing items;
  • Convening as a team to agree on strategy before any cuts occur;
  • Identifying ahead of time what procedure should take place and on what part of the body;
  • Training all staff about how to use electrical equipment;
  • Creating, and then following, an appropriate checklist; and
  • Asking patients to actively participate by getting into good shape ahead of time and scrubbing with anti-bacterial soap prior to surgery.

In the pension world, setting a risk management objective by proverbially marking the target spot with a big X merits consideration. After all, if the goal (or set of goals) is vague or flat out wrong, chances are that the "operation" will fail. Should that happen, the "patient" (i.e. participants) could suffer.

The concept of proper goal-setting is far from trivial. Fiduciary breach allegations are undeniably here to stay, courtesy of an increasingly active plaintiffs' bar. Settlements can cost sponsors millions of dollars, even when a company feels strongly that it has done everything correctly. Changing regulations could up the ante. According to "President Obama to Address DOL Fiduciary Redraft at Monday AARP Meeting" (Think Advisor, February 22, 2015), proposed standards put forth by the U.S. Department of Labor appear to be moving closer towards some type of final conflict of interest rule. In a January 13, 2015 memo, the White House seems to be taking the view that retirement plan fees are often too high and have cost savers more than $6 billion. No doubt the financial industry will continue to rebut these estimates.

Based on my experience as a forensic economist and someone who has served as a testifying expert, goal-setting is hugely important when it comes to resolving disputes. An inevitable question is whether something went awry and, if so, what monetary damages should be paid (and to whom). Answering inquiries about whether wrongdoing occurred (and its magnitude) has to start with identifying the objective(s) and then examining the achievement of said goals (or lack thereof).

Similar to the health care profession, continuing to up its game in terms of process improvement, retirement plan sponsors (and their service providers) have a vested interest in creating goals that are (a) clear (b) measurable (c) realistic and (d) appropriate for the situation at hand.

Pensions and Bankruptcy Claimants

The tug of war continues between pension plan participants and outside creditors. As a result, doing business with troubled municipalities may end up costing creditors time, money and headaches. Just a few days ago, Judge Christopher Klein with the United States Bankruptcy Court for the Eastern District of California ruled against Franklin Templeton Investments. By doing so, this asset manager will not be able to recoup the $32 million it sought from the City of Stockton as the municipality seeks to exit bankruptcy. Instead, as Reuters journalist Robin Respaut writes in "Holdout creditor in Stockton bankruptcy denied higher claim" (December 10, 2014) the city's plan would give Franklin "just over $4 million of the $36 million it said it is owed." This follows an October thumbs-up from the Court to reduce the payout to bond investors in order to maintain retirement and health care benefits and thereby (hopefully) prevent an exodus of badly needed city workers. 

A topic not actively discussed but critically important to ignore is that once-burnt lenders are unlikely to come knocking again. If they do, they will charge a higher cost of capital and demand tighter collateral safeguards to reflect the bigger risk associated with exposure to struggling borrowers. After all, lenders are accountable to their customers. As Bond Buyer's Keeley Webster describes, investors in Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund will suffer as the result of a low recovery rate in the neighborhood of twelve percent for loans made to Stockton. 

As Attorney B. Summer Chandler discusses in "Is It 'Fair' to Discriminate in Favor of Pensioners in a chapter 9 Plan?" (American Bankruptcy Institute Journal, December 2014) putting pensioners ahead of other unsecured creditors may not seem right to some but could be supported by "limited case law assessing chapter 9 plans..." taking into account "the unique nature of a municipality, its relationship to its citizens (including pensioners and current employees) and the purposes of chapter 9..."

To reiterate, customer risk is real for organizations such as Franklin Templeton. Unless its higher costs can be passed along to customers, expect some lenders and suppliers to say "never mind" and look elsewhere for business. This would logically reduce the supply of capital and services and could mean higher costs for all municipalities, not just those seeking bankruptcy protection. As my co-authors and I discuss in "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz (American Bankruptcy Institute Journal, July 2014), the evolution of decision-making can reduce uncertainty. We add that "...legal, economic and political skirmishes associated with municipal bond distress now being played out are helping to set the stage for future clarity." We assert that future bond buyers may still lend to a municipality if they "are comfortable in their belief that large unfunded post-employment obligations can be compromised as part of a distressed-debt workout..." and that "fresh capital can be a lifeline for a municipality that has fallen on hard times, even if it comes with a higher service cost.'

The best outcome is that pension-plagued municipalities seeking to exit from bankruptcy get their financial house in order as quickly as possible. While retirement plan participants have received a reprieve in some situations such as what happened with Stockton, the overall funding crisis is likely to reverberate in ways that could lead to future skirmishes. Witness what is happening right now, courtesy of the U.S. Congress. According to "Pension Bill Seen as Model for Further Cuts" (December 14, 2014), Wall Street Journal reporter John D. McKinnon portends future diminutions in employee benefit payouts if such action is deemed to prevent the "failure of just a few" plans being able to destroy "the federal pension safety net" (i.e. the Pension Benefit Guaranty Corporation). While the focus of lawmakers right now is on corporate union plans, it is not much of a stretch to imagine certain reductions being allowed throughout the United States and in other countries, postured as protection for the "greater good."

Happiness and the Bottom Line

In case you missed it, March 20, 2014 was International Happiness Day. Sponsored by the United Nations International, the Day of Happiness is a reminder that there are lots of good things in this world and a moment of reflection is a nice way to celebrate our gifts. Interestingly and not surprising, eighty-seven percent of people who took the online poll at www.dayofhappiness.net say that happiness trumps wealth. Is this bad news for the financial community? No it is not and here's why.

Research studies repeatedly link emotional well-being with economic productivity. In his informative book entitled "What Happy Companies Know: How the New Science of Happiness Can Change Your Company for the Better," Dr. Dan Baker (with Cathy Greenberg and Collins Hemingway) extols the virtues of businesses that recognize the importance of motivating workers with carrots and not sticks. By extension, happy workers will remain employed and their incomes typically rise as they carry out their duties with a smile. This is great news for the advisers who want to help those with money to invest.

Happiness is certainly a big business. A quick search of Amazon.com for books on this topic yields nearly 40,000 results. There's even a magazine called Live Happy. One of my favorite tee shirt companies is called Life is Good. You can watch "The Economics of Happiness" documentary and follow along with a study guide.

Some people keep a gratitude journal. Setting aside a few minutes of quiet time is likewise popular. ABC reporter Dan Harris must have struck a nerve as his book about meditation is a best-seller. Click to learn more about his 10% Happier: How I Tamed the Voice in My Head, Reduced Stress Without Losing My Edge, and Found Self-Help That Actually Works -- A True Story.

As readers of this blog know. I am a devotee of yoga and try to take a class whenever I can. My reasons include a desire to be fit and numerous advantages of taking deep breaths and focusing on the moment. The boost to concentration levels, especially for challenging projects, is a significant plus. The medical community continues to pay attention to the benefits of mindfulness. In late 2013, Bloomberg wrote about Harvard Medical School researcher, Dr. John Denninger, and his research about yoga, brain activity and immune levels. Since six to nine out of ten visits to see a doctor are cited as stress-related, costing companies roughly $300 billion per year, his federally-funded science can be helpful indeed to both individuals and employers. See "Harvard Yoga Scientists Find Proof of Mediation Benefit" by Makiko Kitamura (Bloomberg, November 21, 2013). Also check out "Take a Deep Breath," posted on the American Institute of Stress website.

Have a good day!

Flu Economics For Companies

If you escaped the flu bug this year, congratulations and best wishes for not getting sick in the next few months. Unfortunately, I was not as lucky. After five tough days of sneezing, coughing and aching, and despite getting a flu shot, I am finally feeling better. I still don't know the culprit other than possibly riding a crowded train last week. Why visibly sick passengers were out and about was a mystery to me until I read "Sniffling, Sneezing and Turning Cubicles Into Sick Bays" by Michael Mason (New York Times, December 26, 2006). He explains that the tendency for employees to show up at work has to do with economics.Some companies do not offer sick pay and days missed translate into a smaller paycheck. In other cases, people tell survey-takers that they feel pressured to show up and fear possible suspension or being fired if they miss work. When companies offer PTO or personal time off, workers may opt to punch the time clock rather than give up days that could instead be spent on vacation. Some companies may not have a telecommuting policy or technology that supports work at home. Other times, individuals may feel that missing work will put them further behind, especially if their firm has downsized and asked those who remain behind to make up the difference.

In what has become known as "presenteeism," the act of attending work while sick has drawn attention from benefits professionals and researchers alike. Companies that scale back benefits may do so to cushion the bottom line but end up losing money. This is because workers who show up sick often underperform while on the job and then infect others around them who in turn get sick and underperform. According to "Unhealthy U.S. Workers' Absenteeism Costs $153 Billion" by Dan Witters and Sangeeta Agrawal (Gallup.com, October 17, 2011), the cost in lost productivity "would increase it if included presenteeism, which is when employees go to work but are less productive in their jobs because of poor health or wellbeing."

Occupational psychologist and founder of a website about work-related behavioral issues, Rebecca Quereshi writes that the topic is viewed differently across countries. She asserts that the UK and European study the "precursors of presenteeism" or why people are compelled to show up to work when they are sick. In contrast, the U.S. focus is on the productivity loss attributable to presenteeism. She adds that "There is widespread agreement that presenteeism accounts for more aggregate productivity loss than absenteeism," in large part because it is "much less accounted for." See "Presenteeism in the workplace, reviewed" (January 19, 2011).

In other articles read by this blogger on the topic of healthcare and the bottom line, the point was made that those who make higher incomes may be more inclined to show up at the office when feeling less than robust. Perhaps that is true but what is known for sure is that bad health impacts the bottom line. According to its September 12, 2012 press release, a study conducted by the Integrated Benefits Institute cites absenteeism and presenteeism as contributors to a loss of $227 billion to the U.S. economy.

As companies grapple with new health care rules and regulations and the challenges of a fragile global economy that keeps everyone on a tight budget, individuals are best served by going on the offensive in terms of trying to avoid a cold or the flu. Chicken soup anyone?

Healthcare Reform - Doctors Head For the Doors

My client conversations are mainly with financial professionals and attorneys. However, as someone who wants to stay informed about the economy, I likewise enjoy getting different perspectives from market participants, especially those who are directly impacted by changing rules and regulations. So it was with interest that I read the following note on my doctor's pay window:

"Dear patients -

As of October 1, 2010, I no longer accept Medicare insurance due to the harassment and cuts in payments by the federal government. My fees are very reasonable. Please feel free to discuss them with me personally. I would love to continue to care for my Medicare patients, just without the federal government telling me how to do my job or how much to get paid. This is just the beginning of the healthcare reform. Please thank your politicians. Remember, elections have consequences."

Whether you agree with him or not, the reality is that, like any regulation, there are unintended consequences. When you deny someone the opportunity to earn a risk-adjusted return, don't be surprised that some individuals exit the market and seek gainful work elsewhere. If true that large numbers of physicians are no longer "supplied" at the same time that health care mandates force demand upward, it's obvious that prices are going to spiral. To the extent that regulations keep prices in check, even more doctors will get discouraged, leave the industry and put more pressure on the demand-supply gap.

According to "The Coming Doctor Shortage" by Herbert Pardes (Wall Street Journal, January 19, 2011), "Health-care reform will add an estimated 32 million people to the ranks of the insured, driving them to seek medical attention that in the past they may have avoided due to expense." In addition, an aging populace adds to demand even as nearly a third of doctors in the United States are older than 55 years with plans for retirement at some point.

The math is straightforward.

  • 250,000 doctors will retire within the next decade.
  • Increased needs require "an additional 130,000 doctors, both general-practice physicians and specialists, 15 years from now."
  • About 16,000 doctors are trained each year.

Besides those doctors who are throwing in the towel, I've talked to quite a few who are discouraging their relatives, friends and family members from studying medicine.

If things don't correct soon, fewer rational individuals will be willing to incur large personal debts and study long hours to become doctors. If that happens, "do no harm" may be the reality of too much legislative interference.

National Nothing Day

Are you ready to celebrate National Nothing Day on January 16 of each year? Created by late newspaperman Harold Pullman Coffin, 1973 marked the debut of this unusual event. The stated goal is for Americans to relax without worrying about missing an observance or celebration of something.

Perhaps not surprisingly, there is mounting evidence that relaxation and good health go hand in hand. According to the Mayo Clinic website, yoga (a type of relaxation activity) reduces stress, enhances fitness, helps with the management of chronic health problems and can keep weight gain in check. Writer Gloria Charlier cites an interview with Dr. Herbert Benson by veteran broadcaster Diane Rehm about his 2010 book entitled The Relaxation Revolution. The central premise is that a mind-body connection exists and must be nurtured. He's in good company since numerous prominent medical experts share his view. For businesses, the introduction of wellness programs can lower health care costs and encourage happier, and logically more productive, employees. Click to read "The relaxation response is healing" (Cincinnati Examiner, August 26, 2010).

If you get antsy sitting around this Sunday doing nothing, check out Meeting Wizard. A colleague tipped me off about this free site that finally (!) gets a handle on email and telephone tag when trying to set up multiple-person meetings.

Rest In Peace

In the last few months, I've watched my mother bear her illness with grace and dignity. She recently passed away, after a struggle with much pain. It has been a terribly sad time but I thank the many friends and colleagues who kept my mother in their thoughts.

In particular, I remain amazed and grateful for the numerous health care workers who tirelessly tended to her needs and those of others in hospice. In conversations with those individuals, it was clear that their work was more than a way to earn a living. It is truly an honor to have met the nurses (male and female) who never complained and instead carried out their work with a smile.

To my dear mother, may you rest in peace and know that you are missed and loved. Like the rose shown here, your beauty endures. You will be remembered with a legacy of purpose and hope.

Have Recent Pension Probes Opened the Door to Better Practices?

 In 1905, poet George Santayana wrote that “Those who cannot remember the past are condemned to repeat it.” Was he prescient or practical, acknowledging that human behavior sometimes tends towards inertia if the challenge is deemed too hard? Unfortunately for those who favor inaction, the tide is turning in favor of transparency and investment best practices (and arguably none too soon).

A recent survey conducted by the IBM Institute for Business Value augurs poorly for those who think the past holds the key to the future. To the contrary, nearly nine out of ten surveyed financial executives said they believe that high returns are no longer achievable and that “excessive risk taking, opacity and leverage” have gone the way of the dodo bird. If true, think about the difficulties that lie ahead for institutional investors.

One asset allocation mistake or sloppy due diligence step could cut short any meaningful chance of realizing even modest yields over time as it will be harder to make up for lost ground. More than a few pension, endowment and foundation leaders will simply have no chance but to button up their procedures in order to mitigate uncompensated risk. Their very financial survival will depend on the proper identification, assessment and management of qualitative and quantitative sources of uncertainty.

New rules will come and go, forcing what regulators will invariably characterize as best investment practices. They will be wrong. Staying in business will critically depend on going well beyond the letter of the law and instead committing to a robust and comprehensive focus on economic "compliance" where it counts, i.e. preserving or growing available cash. For example, suppose an institutional investor conducts background checks on key traders but ignores lock ups or undue concentration of said traders' positions. Absent Lady Luck, the pension, endowment and/or foundation will have taken one step forward and two steps backward by spending money to address one risk factor while ignoring others.

The good news is that opportunity presents itself in these turbulent times. Enlightened organizations can differentiate themselves as advocates of buy side governance, thereby potentially reducing their exposure to litigation, lowering the chance of economic losses and/or enhancing their respective reputations with plan participants, donors, taxpayers, shareholders and other relevant constituencies.

Reform won't be easy. Diminished budgets for risk management technology systems and skilled personnel will challenge even well-intentioned institutions. Unfortunately, excuses will fall on deaf ears if promises can't be kept. A retiree or grantee won't care why the checks don't arrive on time or arrive and then bounce.

The future is here. Everyone is a risk manager now. 

Weight and Benefits - Follow Up

Since the inception of www.pensionriskmatters.com in late March 2006, we have never received any negative comments. To the contrary, feedback from readers around the world has been very positive and insightful. However, there is a first time for everything and I am not one to avoid taking responsibility for my actions. In this case, a reader took me to task for the use of the word "tubby" in a June 25, 2008 post about employee benefits and weight. Out of respect for that reader and anyone else who might have been upset (despite no intent on my part to offend - I have used the word to describe my own efforts to keep excess pounds at bay), I have retitled that post. Let me also apologize sincerely and thank that reader for sending comments our way.

The topic of employee benefit mix is an important one for many reasons. As timely news events occur, we will cover them in subsequent blog posts.

Law Professor Paul Secunda on Obesity and Smoking

In response to my June 25, 2008 post ("Is There a Link Between Weights and Benefits?") about the fiduciary ramifications of asking employees to lose weight or otherwise change their lifestyle, law professor Paul Secunda writes the following:

<< I agree with Susan on this, of course, but wouldn't it be funny hearing someone say: "I am not going to eat that muffin because I might get fired or my health premiums may go up?" >>

Check out what else the creator of the popular "Workplace Prof Blog" has to say on this topic. 

California Healthcare Premiums Go Up

Sacramento Bee investigative journalist Jon Ortiz reports that the giant California Public Employees' Retirement System ("CalPERS") has just announced an 8 percent rise in "its Kaiser basic premiums." According to "Rate outlook dismal for individual health plan subscribers" (June 24, 2008), roughly 2.5 million individuals will feel the pinch. Citing Dr. Michael Kraten, Connecticut-based industry expert, relatively healthier baby boomers and cheaper generic drugs have helped to stave off premium increases, but not for long. Even if large organizations like CalPERS are able to drive a hard bargain, "Whatever price breaks the big players get are passed down the line as providers haggle with doctors and hospitals over payment for services and raise or lower rates on other policy purchasers."

Is There a Link Between Weight and Benefits?

A few weeks ago, en route to speak at a valuation conference about hedge fund issues, I sat next to a health-conscious surgeon. For nearly an hour, he spoke passionately about spiraling hospital and pharmaceutical costs, due in large part to what he described as an obesity epidemic. He offered several compelling examples of procedures that could have been done at a much lower cost, had patients been smaller in girth. Though I consider myself a healthy person (low-fat diet, regular exercise), I do admit to a few pounds of excess baggage. You can therefore imagine my discomfort as I munched on my Power Bar, wondering - Is he addressing non-skinny people like me or outright weight-challenged children and adults?

It was no surprise then that this Sunday's New York Times addressed this problem, said to be costing employers big-time. In her piece, reporter Kelley Holland links to an "aha moment" map, courtesy of the Centers for Disease Control and Prevention. Based on 2006 data, all but four of fifty states clearly struggle with obesity, with at least 20 percent of adults having a Body Mass Index ("BMI") in excess of 30. (According to the Department of Health and Human Services, BMI is a gauge of body fat. BMI numbers above 25 place an individual in the overweight category. Use the online calculator to get a rough estimate of your BMI.) Holland continues to grab attention with some sobering statistics.

  • More than 25 cents of every dollar spent on medical services is due to excess weight complications (based on research conducted by Emory University Professor Kenneth Thorpe).
  • The corporate tab for too many muffins is $45 billion per year (according to a Conference Board report). See Medical News Today, April 10, 2008.
  • Obesity links to chronic health problems more than smoking or excess drinking (based on Rand Corporation research by economist Roland Sturm).

 "Waistlines Expand Into a Workplace Issue" is a scary read. Citing examples of employers that offer incentives to visit the gym and otherwise slim down, Holland writes that more needs to be done, despite the fact that it is a "sensitive" issue. While I'm the last to make a value judgement about weight, some disturbing thoughts come to mind.

  • How are longevity patterns (and the related cost of offering healthcare benefits and a traditional pension) impacted when plan participants are officially deemed overweight?
  • Do employers experience lower costs if their pension plan covers mostly unhealthy participants?
  • For employers that offer both health insurance and a defined benefit plan, do they deem an "optimal" mix of healthy versus not so healthy plan participants? (This assumes that healthier individuals who live longer push pension costs up but keep a lid on healthcare benefit expenses.)
  • Should employers figuratively serve "in loco parentis" or does this expose them to allegations of discrimination?

Ban the coffee cake. Carrots anyone? 

Plan Sponsors Win - Beneficiaries Over 65 Lose

In today's edition, New York Times reporter Robert Pear describes a recent action by the Equal Employment Opportunity Commission ("EEOC") that gives employers free rein to cut back benefits for persons 65 and older. (See "Many Retirees May Lose Benefits From Employers.") The rationale seems to be that, once eligible for Medicare, senior workers should transition fully or partially out of private benefit programs because they are otherwise covered. Quoting EEOC Chair, Naomi C. Earp, the goal is to encourage plan sponsors to continue voluntarily providing and maintaining health benefits. Premiums deemed "too high" and the fact that people are living so much longer than ever before is creating havoc with corporate bottom lines. As a result, "many employers refuse to provide retiree health benefits or even to negotiate the issue." In some cases, if they are unable to contain costs for benefits offered to older workers, companies may decide to cut back altogether. This means that younger workers would be exposed - no employer provided coverage, no Medicare.

According to the December 26,2007 Federal Register, the new policy protects plan sponsors from legal threats of age discrimination in the event that they create a two-class benefits program. The "Appendix to Sec. 1625.32--Questions and Answers Regarding Coordination of Retiree Health Benefits With Medicare and State Health Benefits" provides additional information. The upshot is that employers now enjoy flexibility to (a) provide retiree healthcare benefits “only to those retirees who are not yet eligible for Medicare" (b) modify, reduce or eliminate benefits upon an employee's 65th birthday and (c) decrease or eliminate health benefits for the spouse or children of a retiree of a certain age.  

How many companies rush to the door remains to be seen. As employers struggle to attract and retain good workers, including those with a bit of gray, providing or reinstating diminished benefits may come to pass. Only time will tell.

You Can Get Sick But Not Too Sick

In case you haven't heard, most people think any pension problems are a walk in the park compared to a looming health care crisis. Some think the answer is national health care. Others persist - "Let the market do its thing." This blogger tends to be in the second camp but I am pretty sure we'll end up with socialized medicine at some point . Some say we are already there. After all, who REALLY knows the true cost of a particular service or pharmaceutical? There is seldom a supply-demand dynamic at work.

In a recent Wall Street Journal article, journalist Chad Terhune describes the Tennessee response in the form of a mini-medical plan called CoverTN. Made available to businesses that meet certain criteria, it allows employers to offer health care coverage at a cost far below that of catastrophic insurance. The bad news is an annual per capita limit of $25,000. One hospital stay could wipe this out in short order. Nevertheless, even a few corporate biggies are looking at mini-medical as a way to contain costs.

To read more, go to www.wsj.com and search for "Guarded Health: Covering the Uninsured, But Only Up to $25,000 - Tennessee Experiment Goes Against the Grain As States Remake Care", April 18, 2007.

Pension Risk Matters Editor's Note: Hear what guest blogger, Dr. Michael Kraten, CPA, has to say about health care. His recommendation for more transparency in benefits administration is one we soundly support. Founder and President of Enterprise Management Corporation, a management consultancy based in Connecticut, Kraten is doing interesting research in the area of virtual reality negotiations, health savings accounts and non-profit governance. He is also an accounting professor at Suffolk University in Boston, Massachusetts. To learn more, visit his website at www.enterpriseman.net.

Text from Dr. Kraten:

What is the Aflac duck selling?

If you answered “general health insurance” ... surprise! You are not correct. The Aflac web site offers dental, hospital confinement indemnity, hospital confinement sickness indemnity, hospital intensive care, and specified health event policies ... but not general health insurance.

What's the difference? Well, general policies are designed to cover most medically necessary services, with perhaps a few carve-outs and a relatively high lifetime maximum coverage limit tossed in for good measure. Aflac's policies, though, are only designed to cover a few narrowly defined services, and often include a relatively low annual coverage limit as well.

In other words, these are not general insurance policies at all. They're really prepaid service plans, where the plan manager (i.e. Aflac) keeps the premium if the services are not used by the end of the coverage period. And because the services frequently reflect relatively rare catastrophic events, the premium often goes unused ... and are thus typically converted to profits.

This type of plan is certainly not new to the commercial markets. Delta Dental, for instance, has been offering narrowly defined service contracts with low annual reimbursement ceilings for many years. But now many states are considering the implementation of such programs as well. Tennessee, for instance, recently launched a government subsidized small business plan called Cover TN. Its Program Summary states that it simply covers “basic health needs” only, with an annual maximum coverage limit of $25,000 per year ... not nearly enough to cover many complicated hospital stays.

Other states, such as California and Massachusetts, have opted to pursue a different path, proposing universal coverage programs that would cover most medically necessary services. But the costs of such plans are far more significant, and critics complain that their resultant taxation financing mechanisms are both onerous and self-defeating.

Time will tell whether the universal coverage programs will prove to be cost-effective, or whether the prepaid service programs can provide more than “band aid” protection for bleeding state program budgets. The American public might benefit, though, by receiving honest and transparent explanations from their health plan funding organizations regarding what they can expect ... and what they cannot expect ... for their premium dollars.

The Tax Man Cometh to Health Care

According to "Bush Bids to Increase Focus on Health Care with Plan on Tax-Based Aid for Consumers" (Wall Street Journal, January 22, 2007), the White House intends to curb skyrocketing health care costs by seeking tax relief for some. Journalists John D. McKinnon and John Harwood write that independent buyers of health insurance would get a tax deduction, arguably a boon for the millions of persons who are self-employed or work for companies that do not provide insurance. In contrast, employer-provided health insurance benefits would constitute taxable income. Likely winners include an estimated 80% of employees for whom the average premium (for a family policy) is a reported $11,500. Executives, professionals and some "rank-and-file" union workers may not be so lucky.

In a related article, "UAW May Run Some Retiree Benefits" (Wall Street Journal, January 23, 2007), reporter Jeffrey McCracken describes a "potentially revolutionary plan" whereby the United Auto Workers could assume responsibility for a ten billion dollar plus liability. A critical question is whether big U.S. auto manufacturers can find the money to finance "a handover of future retiree health-care obligations to a union-managed fund." Beyond costs, McCracken posits that union leaders face a real dilemma. Accustomed to negotiating hard on behalf of their members, can or will they want to police members' health care activity as a way to control costs?

As stated here and elsewhere, health care has the potential to dwarf the pension issue in a serious way. (Click here to read our most recent post about health care economics.)

If employers decide they can't afford to offer insurance coverage in its current form, pensions may be curtailed even further as part of a serious look at employee benefits overall. This is not necessarily a good thing if companies and municipalities then find it difficult to attract and retain productive workers.

Add the questionable state of Medicare to the mix and the current situation looks bad. With the 2008 election frenzy already underway, we're sure to hear more about health care solutions. Generating a meaningful dialogue (no sound bites please) is good. Without radical surgery soon, we're in for a long recovery.

Memo About Weight Got This Policeman Fired

Courtesy of law professor Paul Secunda, click here for a legal take on trying to get staff in shape. (In the interest of full disclosure, I could lose ten or fifteen pounds myself, and yes, I'm trying).

Related to today's post about healthcare costs, Professor Secunda raises an interesting question. What can an employer do to improve healthfulness in the workplace without getting in trouble?

Mice, Red Wine and Escalating Health Care Costs

New York Times reporter Nicholas Wade describes research by the Harvard Medical School and the National Institute of Aging that could be a boon for vintners worldwide. Using experimental mice, scientists allege possible benefits of a "natural substance found in red wine, known as resveratrol". One group of furry creatures, fed a high-fat diet, accompanied with daily doses of resveratrol, gained weight but did not experience signs of medical problems and, "even more striking, the substance sharply extended the mice's lifetimes."

Wade describes a second gateway to expanded years - put the cupcakes away. Research done since 1935 shows that "mice fed a calorically restricted diet - one with all necessary vitamins and nutrients but 40 percent fewer calories - live up to 50 percent longer than mice on ordinary diets."

Elsewhere, Medicinenet.com quotes Mark Mattson, Ph.D and chief of the Laboratory of Neurosciences at the National Institute on Aging as likewise extolling the benefits of this approach.

"First, it reduces free radical production, or the production of highly damaging forms of oxygen, and the second is that calorie restriction increases the resistance of cells to stress. We think that both of these are important in protecting against a number of different diseases that have a negative impact on life span, such as cardiovascular diseases and cancer."

If you're panting to try cold kale soup and other goodies (similar to what my husband eats), click here to visit the site of the Calorie Restricted Society for more information.

Lest you are asking what this has to do with benefits, many experts now describe pension "problems" as tiny compared to a looming health care crisis - one that could wreak financial havoc across companies, big and small. So while the prospect of living longer is an amazing gift for many, there is a real cost of providing medical services to retirees. In some cases, post-employment exceeds work span by a significant amount.

At my request, Mr. Robert James Cimasi, president of Health Capital Consultants and author of The U.S. Healthcare Certificate of Need Sourcebook and countless articles and speeches, describes the situation this way.

"The US Healthcare Delivery System is facing what is perhaps its greatest challenge in the expected demand for increased health services from the aging of the baby-boom generation, the fastest-growing segment of the population. With the over 65 years old portion of the US population expected to increase from 20 million in 1970 to 69.4 million in 2030, the entire system by which healthcare services are dispensed in the U.S. is subject to radical change in the next two decades. As healthcare costs continue to rise faster than inflation in the overall economy, driven by advances in technology and treatment (as well as the growing baby-boomer population), pressures to reduce costs will result in a changed paradigm for healthcare delivery, most likely leading to some form of healthcare rationing. The potential result is that the quality of care received will depend increasingly on the individual's ability to pay.

One example of this trend is the accelerating movement from the traditional U.S. health coverage system of 'defined benefits' (where employers provide a package of defined benefits to their employees) to a system of 'defined contributions' (where employers contribute a set amount and then require employees to decide how much of their health benefit dollars to spend by selecting from a range of benefit plans), which is being driven by employers seeking to limit their exposure to what has become double-digit health insurance premium rate increases. These arrangements represent a fundamental shifting of the financial risk of health coverage from the employer to employees, whereby employers can limit their contributions, while employees must contribute increasing amounts of their own money to pay for health insurance cost increases in attempting to maintain the same level and quality of health care for themselves and their families.

This 'sea-change' in the U.S. Healthcare Delivery System presents both challenges and opportunities for the investment community, based to a great degree on the scope of their understanding of the risks related to these fundamental underlying factors."

For additional information, visit the HCC website library.

Other online resources that may be of interest are listed below.

1. National Center for Policy Analysis Health Care Economics

2. About.com Health Care Economics

3. Council on Health Care Economics and Policy

4. U.S. National Library of Medicine Health Care Economics