Plansponsor: Allocating Benefit Dollars
Employers’ total cost for the benefits they provide—health care, retirement and post-retirement medical—rose from 14.8% of pay in 2001 to 18.3% in 2015, a jump of 24%, according to the “Shifts in Benefit Allocations Among U.S. Employers” analysis by Willis Towers Watson. During that period, employer health care costs for active employees more than doubled, rising from 5.7% to 11.5% of pay. Conversely, according to the study, employer costs for total retirement benefits, which include defined benefit (DB), defined contribution (DC) and post-retirement medical plans (PRM), declined by 25%, from 9.1% to 6.8% of pay.
These trends reflect a seismic shift in the allocation of benefit dollars, the study says. In 2001, active health care benefits comprised about two-fifths (42%) of costs, while retirement benefits made up the remaining three-fifths (58%). By 2015, the ratio had flipped, with active health care benefits accounting for almost two-thirds of costs (64%) and the retirement share dropping to just a little over one-third (37%).
However, as more employees worry about having enough saved for retirement, and many still feel the financial impact of the 2008/2009 recession, an increasing number want education and advice about retirement planning. The same Willis Towers Watson analysis found roughly two out of three would trade a portion of their salary for more generous and guaranteed retirement benefits, while only around one-third would make the same trade for more generous health benefits or lower, more predictable costs when using health care services.
Kim Buckey, vice president of client services at DirectPath, specialists in improving participant engagement, in Birmingham, Alabama, says it is not surprising that the allocation of employer dollars has swayed more toward health care, given the increase in health care costs over the past 15 years. In addition, she says, health benefits—unlike retirement funds—are something employees are more likely to access multiple times a year, so a larger spend is almost expected.
Alexa Nerdrum, a senior retirement consultant at Willis Towers Watson in Southfield, Michigan, notes that health care costs have continued to far outpace inflation, and the problem is exacerbated by stagnant wage growth. While medical cost increases have slowed in recent years, insurers in the U.S. still reported annual upward trends of 7% to 9% of pay from 2015 to 2017, says the firm’s 2017 Global Medical Trends Survey Report.
“If pay would have increased in line with health cost increases, we would have seen a lower percentage of health care spend as a percentage of pay,” Nerdrum says, also pointing out that employees overused health care services, “especially with the stress of the financial crisis,” and lacked sufficient resources to help in their decisionmaking.
Further, companies that may have moved from defined benefit (DB) plans to defined contribution (DC) plans have likely reallocated their benefits spend, Nerdrum says. “Employers with DB plans wanted more cost predictability because of the volatility seen in the market. Employers can better understand and budget for DC costs than they can for DB plan costs that move with the market,” she says.
Cost concerns can affect an employer’s retirement plan in other ways. A Pew Charitable Trusts survey found that small businesses are much more apt to offer a health plan to employees than a retirement plan and cite the latter’s cost as the reason. Studies have also shown that costs discourage some employers from offering automatic plan features in their retirement plan.
“Decreasing use of these [design] features can be related back to the most commonly cited primary focus of plan sponsors’ need to cut fees,” a 2016 Cogent Wealth report says.
Meeting Two Sets of Needs
How do employers find a balance between benefits spend and what employees need?
“I think the best way to find balance is to identify and understand the financial needs and priorities of the work force,” Nerdrum says. “That will differ among employers, but targeting communications to different demographic groups allows them to personalize benefits.” For example, Millennials who are healthy and single may find that a cheaper high-deductible health plan (HDHP) is sufficient for their health benefits needs.
For employers to find the right balance, they need to help employees find the right balance, she observes. They can aid in this process by offering technology such as retirement readiness calculators and investment decision tools, by which employees can learn about their DC plan and retirement savings. Employers may also offer health savings accounts (HSAs), paired with an HDHP. Employees may decide to defer into an HSA that permits investment rather than the DC plan.
“Building employee understanding will affect a plan sponsor’s bottom line,” Nerdrum says. “Employees will make better decisions.” One method is to give each employee a pool of money, then let him pick the benefits he needs. This flexibility enables employees to meet different objectives during different times in their career—some will want to pay down a student loan, others to invest in an HSA, and others to save for retirement.
According to Buckey, supplementing that with one-on-one support via telephonic or in-person meetings with benefit educators can help ensure the employee understands all the options available to him and makes the best choice for his individual situation.
“Employees don’t understand how to use health plans; that’s where employers should focus, these days,” Buckey says, noting that a recent study found 20% of employees thought their deductible was their health plan premium. “If there’s that level of misunderstanding, how can we expect employees to make good choices about what plans to select and how to use them?” Of course, reducing health care costs can free up more benefit dollars for employers to spend elsewhere, such as on their retirement plans. “Until we start offering robust education, we won’t see much movement in cost reduction,” she says.
According to Buckey, DirectPath is seeing clients implement basic consumerism education—informing employees about where to do a price comparison; what websites and tools are available to help them get the best price; what questions they should be asking doctors or pharmacists; and how to choose a source of general care, telemedicine or urgent care, etc. Buckey thinks employees would be more than happy to comparison shop for health care services because they do so for everything else.
In addition, more and more employers are signing on for advocacy and transparency services. For example, if an employee needs a knee replacement, an advocate would call around to see where it could be obtained, then present the employee with three options, including quality ratings and prices. “Choosing the least expensive option will save both the employer and employee money,” Buckey observes.
Another change over recent years, she says, is in more employers moving to a self-insured plan, where they assume the financial risk for providing health benefits to their employees. Taking this consumer approach will have an immediate impact, Buckey says, and for some, that will make this type of plan cost-effective.
Other strategies that employers now use to cut costs for health benefits, says the Best Practices in Health Care Employer Survey by Willis Towers Watson, include using centers of excellence—health care providers identified as the most expert and cost-efficient and as producers of the best outcomes for specific diseases or conditions. Further, some employers are using high-performance networks—i.e., narrow networks of high-quality health care providers.
The survey also found that some employers now select health providers based on competitiveness of discounts, network access or cost of care.
Finally, over the last 10 years, employers have increasingly adopted physical wellness programs. Helping employees manage their health means they will need to use their medical benefits less often.
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(Rebecca Moore, Managing Editor, PLANSPONSOR.com)