School employees will be able to pre-fund supplemental coverage for use in retirement.

Los Angeles Times

The latest invention to come out of American universities has nothing to do with science or technology. Instead, it’s a new kind of health insurance.

Worried that many employees were delaying retirement simply to keep their medical coverage, a group of colleges and universities has created a plan that lets both workers and employers contribute to a fund that can be tapped after retirement for medical expenses and for insurance to supplement Medicare.

Though criticized by some, the Emeriti Program — a defined-contribution plan similar in some ways to a 401(k) account — may some day be adopted by other types of employers, say those who run it.

Twenty-nine colleges and universities, including Pepperdine University in Malibu, have enrolled in the plan and an additional 200, including Harvard University, are considering it. The program will start July 1 with an estimated 3,000 individual participants.

Helping run the plan are two corporate giants. Boston-based Fidelity Investments, the nation’s largest mutual fund, will provide investment options and keep the records. Aetna Inc., the third-biggest U.S. health insurer, will underwrite the insurance that members buy after retirement to supplement Medicare.

“This is brand new — you’re pre-funding your supplemental retirement coverage,” said William Custer, the director of health services research at Georgia State University in Atlanta, which has not joined the plan.

Employees who enroll in the plan can contribute an unlimited amount each year in after-tax dollars and employers can choose their own formula for adding to the employee’s contributions. Fidelity then puts the money into its Freedom Fund program, which includes so-called lifecycle funds that invest more conservatively as the person ages. Investment gains and payouts are tax free.

After retirement, the employee enrolls in Medicare, but gets supplemental health insurance from Aetna. The insurance would cover a retiree no matter where they live in the country, even if they split their time between two homes, said Wendy Morphew, spokeswoman for Hartford, Conn.-based Aetna.

While educators hailed the program as a creative way to tackle rising healthcare costs in retirement, some critics call it a worrisome trend to shift more responsibility for those costs to employees.

“The move toward savings accounts to replace retirement coverage is symptomatic of a lack of leadership necessary to make healthcare affordable,” said Jerry Flanagan, with the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based nonprofit.

The program is administered by Emeriti Retirement Health Solutions, a nonprofit organization in New Windsor, N.Y., that was formed by universities to study the issue and find a solution. It received approval from the Securities and Exchange Commission and the Internal Revenue Service to develop the plan.

“In the future we’d like to see it expand,” to corporate workers, said Barbara Perry, a vice president with Emeriti, which found that many university faculty and staff were delaying retirement because of concerns about how they were going to pay for healthcare. SEC and other regulatory approvals would be needed to expand the plan to for-profit employers, she said.

Many of Pepperdine University’s 1,450 employees have expressed concerns about paying for healthcare in retirement, said Chip Moore, the school’s chief human resources officer. Pepperdine will begin the plan Aug. 1 and will contribute roughly $100 a month for employees 40 and older, Moore said. Any employee 25 or older will be able to open an account and start saving on their own, however.

“This helps us solve a problem and takes away a concern that they have had,” he said.

At Dickinson College, a private school in Carlisle, Pa., with more than 600 employees, the plan will be available July 1. No matter what employees choose to contribute, the university will begin putting in half of 1% of their annual pay each year, officials said. Employees 35 and older with at least one year of service are eligible.

“Many people don’t retire because they are concerned about healthcare costs in retirement,” said Annette Parker, vice president and treasurer at Dickinson. “We think this will help us get employees ready.”

Still, critics expressed concern about what the health insurance industry will look like in a few decades, especially if Aetna is purchased or has financial troubles, Custer said.

“One question is the range of choices for your supplemental coverage,” he said.

A spokeswoman for Emeriti said it didn’t anticipate any problems with Aetna, but the firm is under a five-year contract that must be renewed.

Aetna said it was committed to the program. “That’s a fair question, but we’ve been in business for 150 years and we feel very good about the future,” said Jim Foreman, senior vice president of national accounts at Aetna. “We put a lot of our energies and resources into this. It is a long-term investment.”

Funds from the Fidelity account pay the Aetna premiums, until they run out. Any money left in the account after the employee dies can be used by heirs for health-related costs even if they are not yet retired.

The average couple retiring this year at age 65 will need $190,000 to pay for healthcare costs over their lifetimes, Fidelity estimates.

* A new kind of health plan

A consortium of universities has joined mutual fund company Fidelity Investments and insurer Aetna Inc. to create a new type of retirement savings plan for faculty and staff members. It is similar to a 401(k) plan, except that the money can be used only to pay medical expenses after retirement.

Before retirement:

* Employee contributes an unlimited amount each year using after-tax dollars.

* Employer also contributes on the employee’s behalf, with no tax consequences for the employee. The amount is determined by a formula set by the employer.

* Fidelity invests the money in “lifecycle” mutual funds that become more conservative as the employee ages. Earnings are not taxed.

After retirement:

* Employee enrolls in Medicare.

* Aetna offers the employee a choice of three supplemental health insurance policies whose premiums are paid with tax-free withdrawals from the Fidelity investment.

* Fidelity also allows the employee to withdraw money tax free for some out-of-pocket medical expenses.
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Source: Los Angeles Times research