Competition for Retiree Health Benefits

TIAA-CREF is starting a new retirement-related service -- seeking to provide colleges and their employees with a way to save for health expenses that are faced later in life. The move by the pension giant will place it in direct competition with Emeriti, a company that was started in 2005 and has since set up programs at 50 colleges and universities.

The entry by TIAA-CREF into the field suggests not only a fight over colleges' business, but a reality that employees' retirement health benefits may become an increasingly crucial issue for colleges -- and that the days of strictly employer-provided retiree health care are waning.

The way the services by either company work is that colleges set up plans allowing employees to contribute funds to be used for health expenses after retirement. Colleges may match the contributions for employees generally or for those who have worked certain numbers of years. The college contribution isn't taxable, nor are the earnings over the years on the account, so these accounts provide a way for college employees to build up a fund for health expenses, while getting a tax break.

Historically, many colleges have covered the post-retirement health care of employees who have worked for certain numbers of years if those expenses aren't covered by Medicare. But even before the financial meltdown of the last six months, many colleges have worried that these plans are too expensive, and have explored ways to cut back on coverage, especially for new employees. At the same time, colleges depend on regular retirements of senior employees to make room for new faculty talent -- and college administrators have taken note of numerous surveys finding that many professors delay retirement out of concern over health insurance, not salary.

That's where TIAA-CREF and Emeriti both come in, selling colleges plans that allow them to provide assistance with health insurance for retirees, without the "very open ended promises" of traditional plans, said Douglas Chittenden, vice president for institutional product management at TIAA-CREF. While most of corporate America has simply told retirees "that they are on their own" for retiree health benefits, higher education can't do that, given the need for retirements, he said.

While Chittenden said that some employees in higher education may prefer the old system, he noted that most health policy experts believe those plans to be "unsustainable" and doomed to be replaced (even if current retirees and employees may well be grandfathered in).

He predicted that the approach TIAA-CREF is now offering would encourage savings by employees and contributions by their college employers. Colleges are most likely to influence employee behavior to participate and eventually to retire, if employer contributions are made. And that should make the plan attractive to employees, he said.

TIAA-CREF has commitments from a half dozen colleges to start these plans, even in advance of a full launch of the program, Chittenden said, and expects 15-20 on board this year. (He declined to name them.)

Chittenden cited several reasons why TIAA-CREF's service would be superior to that offered by Emeriti. He said that TIAA-CREF made no assumptions about how participants would spend their retirement health funds -- they can be used to buy insurance from any company, for co-payments on insurance coverage already obtained, or for any qualified medical expense. In contrast, he said Emeriti's plans assume a desire to use the funds saved to purchase insurance offered by Aetna, its primary partner. Further, Chittenden said that the new service would be a "natural extension" of TIAA-CREF funds used by college employees for their retirement savings. Paperwork and planning could all be set up easily and in one place, he said.

Not surprisingly, Emeriti has a different view of the market and its role in it. And in this particular competition, the players know one another well. Several of Emeriti's leaders had long careers at TIAA-CREF. And John H. Biggs, the retired CEO of TIAA-CREF, sits on the Emeriti board.

Deanne Shallcross, vice president for communications and education at Emeriti, said that TIAA-CREF was overstating the extent to which Emeriti plans are linked to Aetna insurance. She said that Emeriti participants have freedom to use their funds (which are invested by Fidelity, a TIAA-CREF competitor) in a variety of plans beyond those offered by Aetna. But she said that the links to Aetna meant that participants were receiving "pre-vetted" options and could avoid the "daunting prospect" of shopping for insurance. "We have a comprehensive solution and TIAA-CREF is not offering that," she said.

Shallcross said she believed that TIAA-CREF had been "hearing from its constituents" about the importance of retiree health care. "We actually think that TIAA-CREF's entry into the field validates the need that we saw."