Case Study: Growth through Acquisition and the Impact on Retirement Plans

The Westchester County Health Care Corporation Affiliated Employers 401(K) Plan (WCHCC) was established in 2009. At the time, there were approximately 70-90 employees and participants. As of March 2010, total assets in the 401(k) plan were less than $200,000. Over the ensuing ten years, the retirement program would swell to over 8,000 participants and more than $400 million in plan assets. The program began with Westchester Medical Center Advanced Physician Services, P.C. and WMC-NY and expanded through strategic acquisitions of NorthEast Provider Solutions, Westchester Medical Regional Physician Services, PC, and Mid-Hudson Valley Staffco, LLC. Below is a description of WCHCC’s ongoing path to maintaining harmony with its retirement plan while it integrates new health systems and grows into a large regional player in the healthcare market.

In 2014, WCHCC acquired Saint Francis Hospital out of bankruptcy and established it as a division of WCHCC, naming it the Mid-Hudson Regional Hospital (MHRH). Employees who were participants in the former St. Francis plan were given the option to roll over their accounts into the new MHRH Plan sponsored by WMC – NY. The MHRH Plan was established May 9, 2014 for employees of Mid-Hudson Valley Staffco, LLC and Employees of Westchester Medical Regional Physician Services, P.C. At the time, the WCHCC 401(k) plan had a little less than $12 million in assets, while the MHRH plan held almost $27 million by the close of 2014.

As WCHCC began the process of combining these two plans, they encountered a common issue with hospital mergers, in that the employer contribution formulas for the two plans were quite different. MHRH offered participants up to 2% in employer contributions to the plan split between a 1% base contribution, and up to another 1% employer matching contribution. WCHCC provided its participants up to 4% in employer contributions, all through employer matching of employee deferrals. Before these plans could be integrated, WCHCC had to run non-discrimination testing on the combined plans. It was determined that the combined plans would likely fail this testing if significant changes were not implemented. Per ERISA regulations, WCHCC had two years to resolve these potential problems and combine the two plans.

Beyond the differences in contribution formulas, another noteworthy divergence was that the weighted average cost of the WCHCC plan, which by March 2015 was over $19 million in assets, was just 0.41%; whereas the MHRH plan, which had by then grown to over $30 million, had a total weighted average cost of 0.78%. Given their relative asset size, it was surprising that the MHRH plan was more expensive. Between these issues and the use of two different recordkeepers for the two plans, WCHCC decided in June 2015 to launch a recordkeeper RFP, including both incumbent providers, as well as outside, non-incumbent vendors.

In 2015, WCHCC announced the creation of Westchester Medical Center Health Network (WMCHealth). Over the course of the next 18 months, WCHCC selected a recordkeeper for the consolidated plan, updated the lineup for both plans so that the investments would be the same, enhanced the MHRH employer contribution formula to match the WCHCC formula, officially merged the two plans as of 1/1/2017, and changed its name to the WMCHealth Network Affiliated Employers 401(k) Plan. During this same time, WMCHealth also merged the two plan oversight committees into one representative group of members from the various facilities. By this time, the plan assets exceeded $75 million.

Meanwhile, as the retirement plan oversight committee was taking the above steps to simplify and improve the program for its now larger employee population, WMCHealth continued to seek additional partners for overall expansion. In May 2015, WMCHealth finalized an agreement with the Bon Secours Charity Health System, Inc. (BSCHS), based in Rockland and Orange Counties, adding another three hospitals, two skilled nursing facilities, a medical group and 4,000 employees to the WMCHealth network (1). Similar to the situation with the MHRH acquisition, the existing WMCHealth retirement plan was smaller than the plan of the entity that it acquired. BSCHS administered a retirement plan with approximately $150 million in assets as of 3/31/2017, whereas WMCHealth’s plan at that time held assets of approximately $83 million.

Another similarity was that the WMCHealth plan, though holding a little more than half of the plan assets as compared with the BSCHS plan, was less expensive. The weighted average fee for WMCHealth was now 0.39%, whereas BSCHS was 0.40%, plus a $68 per-participant charge (which made the total approximately 0.60%). Once again, WMCHealth determined that conducting a recordkeeper RFP would allow for the greatest opportunity for all participants to receive the best possible services from the retirement plan provider.

Following an extensive evaluation process, WMCHealth decided to retain the provider from MHRH as the recordkeeper for both plans. This transition occurred in the summer of 2018, by which time the WMCHealth plan had grown to over $100 million, with the BSCHS plan around $180 million. The RFP process resulted in a reduction in fees for both the WMCHealth and BSCHS plan participants. With the provider cutting its recordkeeping fees for WMCHealth from 0.19% to 0.13%, the weighted average participant fee declined from 0.39% to around 0.30%. The BSCHS participants experienced even more of a reduction, as its fees went from 0.40% to 0.28%. This included a transition to the WMCHealth investment lineup, which aided in this reduction and overall enhancement.

A difference with the BSCHS plan is that it is a 403(b) plan. Since WMCHealth administers a 401(k) plan, they will not be combining these two plans into one; instead, they will operate the two plans side-by-side. However, because they are using the same recordkeeper, they have secured enhanced pricing for both plans, as referenced above. The provider was willing to offer BSCHS the same recordkeeper fee it was offering the WMCHealth Network. Implementing the same recordkeeper and the same investment lineup also helps for consistency among employees. When different hospitals of the same system have different programs, employees among both hospitals can feel that their counterparts might be getting a better deal. Using the identical program eliminates that sentiment.

WMCHealth also acquired the HealthAlliance Hospitals, based in Kingston, NY, in 2016, including two hospitals, a medical group and a skilled nursing facility. This acquisition required the integration of 1,600 employees into WMCHealth’s overall operation, including the retirement plan. Once again, WMCHealth conducted its evaluation of the program to identify similarities and disparities among the plans offered.

HealthAlliance has a complex retirement plan structure with multiple 401(k) and 403(b) plans for its employees through its various entities. WMCHealth is reviewing the plan demographics, eligibility and contribution formulas to determine compatibility with its own formula. There is a broad range among the different HealthAlliance groups and WMCHealth with respect to their provisions.

One significant benefit to the HealthAlliance employees with this combination will be the cost savings. The weighted average fee among the investments from the four current providers within all of the associated plans is 0.84%, with one plan having an average fee of over 1.00%. Migrating to the WMCHealth Network investment lineup and recordkeeping fees will reduce the fees by nearly half, and collectively save the participants over $500,000 per year.

As is apparent from the above description, combining the retirement plans of newly acquired entities is complicated. There are many considerations related to plan provisions and making sure that the integrated program will remain compliant. Beyond this, there is the communication outreach to employees, who are being integrated into the new combined entity with a potential changing retirement benefit structure, along with a new recordkeeper and investment lineup. This causes disruption. Given that the retirement plan is rarely a primary, or even secondary, focus, as healthcare organizations consider the implications of a potential transaction, the determination of the impact to participants, and the potential options for the plan going forward, often must be assessed and implemented very quickly. This adds to the anxiety of employees.

However, plan sponsors can mitigate this anxiety through detailed and continuous communication. Once employees get past the concerns about how the transaction impacts their job, their commute, and their work environment, they will start to focus on things like the retirement benefit. Plan sponsors can ease this transition with clear messaging, and by using many communication channels to enable all participants to receive information via the medium they prefer – print, email, and onsite groups, as well as one-on-one meetings, and other methods. This has been particularly important within the WMCHealth network, where each of the different hospitals and other entities have their own preferred mechanism for providing and receiving information.

Having been through the above merger/acquisition transactions, WMCHealth has become familiar with the types of situations that occur when combining retirement plans. While this is not necessarily the procedure that all healthcare organizations may or should implement, it has enabled WMCHealth to successfully integrate plans and enhance the overall benefits both for its existing employees, as well as the incoming staff from the acquired facilities. An acquiror needs to conduct a detailed analysis of the plan-related contracts and agreements of the acquired system as early in the process as possible. From this, the acquiror can determine how best to complete the combination, determine whether a recordkeeper RFP is necessary, and set about developing the associated participant communications to help keep the employee population informed.

(1) WMC owns 60% of BSCHS, and operates the system as a joint venture with BSCHS’ original parent organization.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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