Barry’s Pickings: Benefits and the Role of the Employer

Michael Barry, president of October Three (O3) Plan Advisory Services LLC, discusses how employers balance the various needs of employees with which benefits to offer.
Art by Joe Ciardiello

Art by Joe Ciardiello

Humans face a set of existential challenges, generally associated with what economists call “dependency.” In order simply to reproduce the species, humans must care for, nurture and educate their children for a long period of time. During that period, either the children are too young themselves to “earn a living,” or investment in their children’s future (e.g., through education) will pay off in long-run earning power that far outweighs their present earning power.


At the other end of life, humans must care for their parents during a period when the parents are (likewise) no longer capable of earning a living. As I discuss in my book (Retirement Savings Policy: Past, Present, and Future), if for no other reason (e.g., filial piety or simple compassion), humans undertake this burden to set an example for their own children as to how to behave when their parents get too old to take care of themselves.


These two burdens—raising children and caring for older parents—are, as anyone who has personally undertaken either or both of them can tell you, massive. The nearly $1 trillion per year we spend on Social Security benefits is one measure of this burden. The $620 billion per year we spend on education is another. And those are just the numbers for public spending—in effect, the portion of these costs that has been “socialized.” Individuals themselves will spend at least as much money, and a whole lot of time, doing homework with their kids or bringing groceries over to mom.


One way to divide the world is between those who can’t work, and are therefore dependent on someone else working, and those who do work. That is: between employees and their dependents. This is at least one reason why, when we consider a dependency problem—whether it is taking care of children or the aged or the disabled—we focus on employment. Employees are (over any sort of long run) the only persons who can bear this burden of dependency, because they are (with certain non-significant exceptions) the only people making a living.


But why should an employer care about dependency?


So—the challenge of dependency is the unique problem of the employee. But why should her employer care about that problem? There are all sorts of problems that the employee may have that the employer doesn’t undertake to solve—food, clothing, and shelter being three obvious big ones.


As we have, in the corporate world, moved away from defined benefit to defined contribution retirement plans, employers have outsourced to employees more and more responsibility for “providing for their old age.” This is sometimes explained as “focusing on core competencies” or by a statement such as “we are not in the benefits business.”


That is, I believe, a misunderstanding what is actually going on.


Employee focus is just as important as employer focus


It is (in fact) a rational and common strategy for a corporation to focus on making widgets rather than gadgets, because its “core competency” is widgets, not gadgets. But just as important as employer focus is employee focus. Thus, employers also (and perhaps even more critically) want their employees to focus on making widgets—not on worrying about how to take care of their aging mother or on how to provide for their own retirement.


In this regard, the critical question is: can an employer, at the staff level, efficiently add value by solving any particular employee challenge?


Thus, it’s in the employer’s interest that its employees not waste precious and productive time and focus on managing their retirement savings, or taking care of their mother.


What benefits should an employer provide?


The identification of what is an appropriate employee benefit for the employer to provide, and what is something that the employee can simply be left to handle on his own, requires some judgement. And the answer may change over time.


I would identify at least four factors that may make a particular employee “need”—health care, retirement savings, family leave—an appropriate employer-provided benefit.


First, and as a threshold matter, if the need is a consequence of dependency—of the need for the employee to support others or her dependent “future” self, in old age. One example: the effective subsidy at most employers for family medical coverage.


Second, if the employer can add scale unavailable to the participant. Again, group medical is a (massively) obvious example. And, indeed, being able to get medical benefits is, for many, a key determinant in taking one job over another (that doesn’t provide benefits).


Third, where there are significant market impediments to the employee paying for those benefits herself. Where the relevant market is inefficient—think about the current annuity market, for instance—or the employee is generally at a significant information disadvantage—think about the financial markets, for instance—and where the employer can improve employee outcomes at a relatively low cost, an employer-provided benefit—health insurance or expert investment management—is a “win-win”—more technically, a Pareto efficiency.


Fourth, where are there are tax benefits available to the employer that aren’t available to the employee, e.g., the tax benefits with respect to employer-provided medial and retirement benefits.


No “one right answer”


With respect to all of these factors, the facts on the ground may (in particular circumstances) change and produce a different answer: particular dependency challenges may disappear or (more typical of the last 100 years) become more acute; scale may become less important; markets may become more efficient and more transparent; tax law may change.


By focusing on this core issue—whether the employer can efficiently (that is, at a lower net cost) help the employee solve an employment-related problem—managers can sort out those employer-provided benefits that make sense from those that don’t.


This will typically be a much more complicated process than it at first seems, involving both quantitative issues (what is the employer cost vs. the employee cost?) and qualitative issues (is this really an employment related issue?).


Back to Coase


In the end, this decision challenge is another instance of the cluster of issues identified by (Nobel Prize winning) economist Ronald Coase in his (17 page) paper The Nature of the Firm (1937).


Managers are always considering a complex set of tradeoffs with respect to in- or out-sourcing different functions. The easy metaphor for this is the department store versus the shopping mall—which model is best? The auto and steel industries both began with the production chain horizontally dispersed. They then went through a period of vertical integration. Then—in response to changing conditions—they went through a period of re-horizontalization.


In benefits: the employee brings to the workplace a unique set of challenges (associated with dependency). With respect to some of those challenges (many of them critical), the employer is able under some conditions (many of them long-enduring) to (efficiently) add value to the employer-employee relationship. That’s an opportunity. Those employers who effectively exploit it will out-compete those who don’t.


Michael Barry is president of October Three (O3) Plan Advisory Services LLC, and author of the new book, “Retirement Savings Policy: Past, Present, and Future.” He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly about retirement plan and policy issues.


This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.