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Prudential Financial to freeze some retiree medical benefits; workers feel ‘shocked and betrayed’

The financial services giant, with $1.7 trillion in assets, stunned retirees with news that it's freezing health-care benefits in place even as it offers retirement services to the public.

Charles Lowrey, CEO of Prudential Finance, headquartered in Newark, N.J.
Charles Lowrey, CEO of Prudential Finance, headquartered in Newark, N.J.Read morePrudential Financial

Prudential Financial in summer 2022 will stop contributing to medical savings accounts for current retirees, according to a letter sent this month.

In addition, Prudential retirees must now use all the money accrued in the accounts over 20 years, rather than over their lifetime. And any remaining balance reverts back to Prudential.

Pamela Faccone, a Newark-based employee for 31 years from 1987 and 2018, said she feels “shocked and betrayed.”

“Like many other loyal employees, I saved for retirement but had figured this account into my short and long term plans. Trying to correct my course at this late stage is like asking an aircraft carrier to turn on a dime,” said the 63-year-old. She counted on these so-called RMSA funds of $94,000 for health-care premiums and medical expenses for the rest of her life.

Prudential’s announcement comes after Vanguard also recently modified its retiree medical accounts. Based in Malvern, Pa., Vanguard initially cut the benefit entirely with one day’s notice, but reversed the decision after an outcry from employees.

Current Vanguard retirees and those who retire by the end of next year will retain their medical accounts. But anyone hired since the beginning of 2020 is ineligible for the benefit.

The move is not a surprise to experts. Large employers for years have worked to limit health-care benefits to deal with rising health costs, said Tricia Neuman, senior vice president of the Henry J. Kaiser Family Foundation and executive director of its Program on Medicare Policy.

“We see a pattern of employers looking for ways to limit liability and in many instances, the shift saves money but moves costs to retirees,” said Neuman.

The percentage of large firms offering retirees health-care benefits has fallen steadily over time, to 27% in 2021 from 66% in 1988, Kaiser’s annual Employer Health Benefits Survey found.

“This is part of a pattern of decline of retiree health contributions over many years,” Neuman said. “Employers are scaling back their liability and contributions for retiree health benefits and generally shifting costs” onto workers.

» READ MORE: Kaiser's 2021 Employer Health Benefits Survey

Prudential issued a statement on Wednesday, saying it had made some changes in response to employee complaints. The company will now allow retirees to spend down their accounts over 20 years instead of 10.

The company also expanded “eligible health-care expenses to include past expenses, from the retiree’s date of retirement, as well as other employer-sponsored coverage paid on a post-tax basis,” a statement said.

Many retirees are still angry. James and Ramona Musso both worked at Prudential offices in Iselin and Roseland, N.J., for a combined 72 years. Ramona, 57, took a buyout in 2020 with assurances that her $81,000 in RMSA money was part of a total separation package. James, 64, retired in 2017 with a balance of $125,000 in his RMSA.

“That’s the reason I left the company. They let us leave with the RMSA,” said Ramona Musso. “There’s no way I would have left without that as part of the package.” They moved to Lewes, Del., where they retired thinking they’d never have to work again.

Prudential manages more than $1.7 trillion in assets as of November, and has operations in the U.S., Asia, Europe, and Latin America.

CEO Charles Lowrey has pledged to find $750 million in cost savings by the end of 2023, as well as undertaking a share repurchase plan, which has pleased Wall Street. The company recently sold off Prudential Retirement and a part of its annuity business. Today its focus includes life insurance, annuities, mutual funds, and investment management.

Investors have bid up the stock price from $42 in March 2020, the start of the pandemic, to just under $107 a share Wednesday.

Retiree Medical Savings Accounts

Prudential set up RMSAs after going public in 2001 and funded the retiree medical savings accounts in a manner similar to Vanguard. Money accrued each month in the accounts so when employees retired, they used the funds to pay health-care premiums and medical expenses.

In cases like the Mussos, longtime employees’ account values grew to hundreds of thousands of dollars over decades. That’s in part because Prudential credited the accounts a 4% annual interest rate.

That also stops under the new benefit.

One former employee wrote in the Pru Crew Facebook group: “I understand the need to cut costs, but putting a plan in place that will likely result in retirees forfeiting money seems contradictory to the company’s focus on saving and planning for retirement.”

Faconne also wrote a letter to Prudential executives, saying: “I was proud that I worked for a company that valued ethics and keeping its promises. I feel duped for believing the hype. They changed the rules in the middle of the game,” adding, “It’s not too late to do the right thing.”

Headquartered in Newark, N.J., Prudential Financial (symbol: PRU) employs tens of thousands worldwide, with 14,000 in the U.S., including sales offices at Lancaster, Pittsburgh, Chalfont, Dresher, Willow Grove, and Scranton, Pa., and New Jersey towns such as Woodbridge and South Plainfield.

Dubbed “Mother Pru” and “the Rock”, the 145-year-old company was once considered a paternalistic employer. Now, many Prudential retirees — and current workers — are taking to social media to decry the financial services company ending its generous medical retirement accounts.

Retirees by next summer must use the RMSA balance within a 20-year time frame. Prudential expanded the eligible expenses to include out-of-pocket deductibles, co-pays, and coinsurance, or qualified medical expenses listed in IRS publication 502, such as contact lenses and eyeglasses, dental services, and hearing aids.

These can be paid for using RMSA money even after the benefit freeze in mid-2022.

But retirees aren’t the only ones angry. Current employees, particularly those transferred as part of Prudential’s sale of its retirement business to Great-West’s Empower, get nothing under the benefits change. Employees who are not old enough to retire may have to forfeit any money accrued.

Cost shift continues

What can workers do?

Health savings accounts are another vehicle large employers are offering as a way to shift medical expenses to workers. But these also offer tax advantages.

HSAs “take in your pretax money and disburse tax free money,” said Ann Kavanaugh, a former Vanguard financial adviser, although only for medical expenses. Those can include everything from eyeglasses, in-home medical care, hand sanitizer, and other costs.

HSAs are best “when you have a high deductible health plan. If you chose a high deductible health plan and are under 65, you can save a substantial amount of money with HSAs” if your health holds out, said Kavanaugh.

Workers with high deductible health plans can contribute $3,600 a year for individual plans and $7,200 for family plans, according to the latest 2021 IRS contribution tables.

Still, Americans have been slow to adopt HSAs, perhaps because they’re more helpful to those with high-deductible plans.

The number of accounts rose to an estimated 31.2 million, with $87.3 billion in total assets at the end of Jan. 2021, up 6% since the end of 2020. That’s according to the Plan Sponsor Council of America’s latest report and figures.

“Even employees who have an HSA often don’t understand how they work, or how contributions can grow, and most have no idea how much health care will cost in retirement,” the report found.

Prudential’s retirees aren’t impressed

Theresa Rossi said she trusted her former employer Prudential to be “fair and ethical. This account was a part of our retirement plan, we are not wealthy people. This will be financially devastating to most of us. It is very disappointing that Prudential is taking advantage of the most vulnerable sector for their bottom line,” said Rossi, who worked from 1978 to 2012.

I was always proud to be a part of Prudential. I certainly do not feel that way today.”

In Prudential’s plan documents, similar to Vanguard, the company includes legal language saying it can modify or terminate its policies and benefits “without notice to or consent of any participant, employee or former employee.”

But Prudential’s focus on retirement could complicate its plans to remove benefits from its retirees.

For financial services companies such as Prudential, “they’re in the business of planning for retirement,” said Robert Field, professor of law and health management and policy at Drexel University.This could be a black mark for them if the public thinks they’re not taking care of their own retirees.”