The approach to LTC: DC or DB?

One notable trend in employee benefit plans has been the steady growth in the proportion of Defined Contribution plans.  Retiree Medical and Pension benefits are prime examples of the current move away from the Defined Benefits (DB) approach to the Defined Contribution (DC).  According to the Bureau of Labor Statistics National Compensation Survey of March 2005, 48% of establishments offer DC pension plans whereas only 11% offer DB plans. Reasons for this trend might include administrative ease, and employers’ preference for shifting the risk for retiree income levels from themselves to employees.

The true group long-term care arrangement we propose leans more towards a DB approach, which is perhaps counterintuitive given the general trend.  One argument supporting this approach, however, relies on the fact that offering long-term care benefits entails less risk than retiree medical benefits, for example.  One could argue that this coverage is a significantly less risky undertaking for employers than providing retiree medical coverage (please see December 2005 True Group LTC Insight for more details).

However, the investment risk associated with the DB approach, along with other factors such as complexity, government regulation, flexibility of plan design, and current business environment, advocate against the DB plan style.  So, how can the true group long-term care design move closer to a DC arrangement?

There are several possibilities of achieving ‘DB-to-DC’ transformation for the true group plans.  The simplest is through establishing an insured LTC program, in which the employer contributes a fixed amount per year.  If the insurer chooses to raise the premiums, which is its right, the employer could pass all of the increase onto employees, while maintaining the employer’s fixed contribution amount.

Alternatively, in a self-funded LTC plan, the employer has full control of the fund as experience unfolds (contrary to the fully insured method).  If experience emerges unfavorably, the employer could respond with a change in contributions for the employees or a change in the level of benefits.  In this fashion, the employer could remain insulated from disappointing investment earnings or higher than expected long-term care costs.

Lastly, an individual employee account that includes tracking of individual investment returns, where the employer contribution could be fixed.  In each year, the cost of covering long-term care (perhaps purchased from an insurer) for that year could be deducted. The employees would need to be advised of the value that could probably be funded based on their current account balances.  This would effectively create a “Universal LTC” plan.  This would be potentially complex to communicate to participants, however.

True group long-term care plan by no means is carved in stone as a DB plan, and can be easily designed to possess the advantages of the DC plan.

Why is true group long-term care so important?

• Many Americans will have no way to pay for long-term care services when they are needed.
• Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
• Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.