Health and welfare benefits are a powerful tool to attract and retain employees. But as costs continue to escalate, employers are finding it more difficult to maintain competitive benefits, which are often one of the top three expenses for a business. When coupled with the multitude of other expenses associated with doing business, many employers are looking for ways to reduce the expense of benefits, says Amy Broadbent, vice president, JRG Advisors, the management company of ChamberChoice.
“Imagine an approach that would enable employers to control costs by establishing a predictable employee benefits budget for the next three to five years, while at the same time offering increased freedom of choice and flexibility for employees,” says Broadbent. “This is not as unrealistic as it might first appear, as a defined contribution approach allows employers to control costs while offering employees a wide range of benefit plans from which to choose.”
Smart Business spoke with Broadbent about how a defined contribution approach can help employers control costs and give employees a wider range of options.
How does the defined contribution approach work?
The driving product line is employer-sponsored health insurance. This unique approach is designed to lower both employer and employee costs, and the concept is simple.
In the traditional approach, the employer selects and funds the same insurance plan for all employees in a one-size-fits-all approach. The employer chooses one or two plans to satisfy all employees, yet, in reality, this canned approach only satisfies a few. A diverse work force equates to diverse needs. Every employee’s needs are different, and no one solution is going to meet all of them when it comes to benefits.
Alternatively, in a defined contribution approach, the employer designates a fixed amount of money, or a defined contribution, to each employee. Employees then use that money to purchase individual health care insurance, selecting products that specifically meet their needs and those of their dependents.
The defined contribution scenario enables employees to choose what they want, not what they are told they can have. This approach extends beyond medical benefits. Employers can make a strategic decision as to the amount of money they will make available and offer a wide range of insurance products, including dental, vision, life, disability, long-term care, cancer insurance, auto/homeowners insurance and so on.
How is the amount of money allotted to employees determined?
Typically, the amount of money allotted to employees is based on their eligibility tier (employee, employee/spouse, family) or their tenure with the company. The amount does not have to be the same for each employee. According to federal law, ‘a plan or issuer may treat participants as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of participants is based on a bona fide employment-based classification consistent with the employer’s usual business practices.’
There is no maximum amount that employers can contribute, and no minimum that is required.
How can a defined contribution plan benefit employees?
A defined contribution, coupled with a Private Exchange platform will include employee tools and personal support to assist with the decision-making and selection process. This employee engagement results in a better understanding of the true cost of each product. Employees purchase based on their own personal needs and build their own custom benefits portfolio to guard against their personal risks, resulting in increased employee satisfaction.
Defined contribution offers multiple advantages for the employer, as well. Making a strategic decision relative to how much to spend per employee per year enables the employer to set predictable long-term goals, while eliminating multiple administrative tasks such as employee education, benefit communications, enrollment assistance, ongoing customer service support, compliance issues, etc.
A defined contribution approach allows employers to focus on their business, not on benefits. Employers can control their benefits budget and save money, expand their benefits and increase service administration at no added cost, and enable employees to have the tools and resources they need to purchase the benefits that work for their families and their personal budgets.
How can the defined contribution approach lower costs?
The approach shifts financial responsibility for health care from the employer to the employees, giving employees more responsibility and choice in how they spend their health care dollars. They have a direct financial incentive to spend those dollars wisely. The defined contribution approach to benefits offers an innovative solution for employers. This platform transforms the traditional approach to employee benefits and offers a sustainable win-win for employers and employees alike.
Amy Broadbent is vice president, JRG Advisors, the management company of ChamberChoice. Reach her at (412) 456-7250 or [email protected].
