In his 2012 article, “Too complex to depict?”, Professor Henry Hu of the University of Texas Law School asks whether “too-big-to-fail” banks are too complex to describe and, if so, whether they might also be too complex to exist. The same questions could easily apply to some of today’s pension and benefit plans.
Here’s the issue: as pension and benefit plans grow in complexity, they also become more difficult to communicate. The result: members don’t understand them, use them effectively, or value them. Complexity, even when introduced with the best of intentions, can have a negative impact.
There are many factors underlying the growing complexity of our plans. Here are just three of the key drivers:
Technology-fuelled modelling—Modelling tools now allow us to test thousands of different plan design scenarios. As a result, sophistication can easily outstrip reasonableness. For example, when your “winners and losers” analysis suggests that a proposed change may negatively affect a handful of key opinion leaders, you might be tempted to introduce a range of secondary changes that appease these leaders but make the plan more confusing for everyone else.
Tinkering—This is a common problem for plans that have evolved over many years. The plan is endlessly tweaked to avoid the challenges or cost of rethinking plan design. Years of incremental change give rise to a quagmire of peculiar plan provisions, which often seem to lack any rhyme or reason from the plan members’ perspective. Older DB pension plans are particularly susceptible. What were once simple early retirement provisions may now require four pages of legal text to describe all the different age- and date-related formulas, reductions and supplements that come into play—making it next to impossible for members to make informed decisions.
Lack of guidance—When you combine technology-fuelled modelling with a pension or benefits expert who lacks the skill to guide plan leadership toward a sensible plan design solution, the results can get very messy. How often have we seen drug and dental plans with an incomprehensible combination of co-pays, deductibles, dollar maximums, equivalents, reference drugs, and substitutions—simply because no one is standing back and weighing the trade-off between innovative cost-savings solutions and plan effectiveness?
The danger of plan complexity outpacing our ability to communicate, or employees’ ability to understand, is often overlooked.
Some of the blame rests with experts who get carried away with the possibilities and lose sight of the plan’s underlying objectives. But it’s also up to plan sponsors to balance the demand for cost efficiencies with the needs of the end user. After all, what’s the point of offering a plan if your employees don’t understand it, use it, or value it?