Ben was once your average factory worker who successfully climbed the ranks into management thanks to his keen ability to motivate and inspire productivity amongst his peers. Today, our meeting agenda included a review of his retirement goals. As he was bringing our team up-to-speed on recent changes in his company’s benefits, he paused for a moment. “You know,” he reflected, “I really would be in trouble right now if it weren’t for the fact my employer has remarkable benefits. I’ve never had to worry about my son’s need for specialized and frequent medical care, or about being out of work last year for six months with a broken leg. You know how important my family is to me,” he continued, “thankfully I don’t have the financial stress that so many of my friends do.”
Old Mr. Webster defines a “benefit” as something good, helpful or extra; something that promotes well-being. Traditionally, employee benefits were seen as a way for employers to make a positive financial impact and give back to the people they wanted to attract and retain, workers just like Ben. So why is it that employers have become overwhelmed and burdened by the very thought of offering employee benefits? Perhaps it is because the terrain has become more challenging concerning benefits—health and welfare offerings, retirement plans, paid time off, etc.—due to the fact that new rules and regulations are making administrative duties more time consuming and costly to plan sponsors and more confusing to employees.
How Did We Get Here, and Where Are We Going?
Roughly 70 years ago, American companies began offering health insurance as a way to avoid wage and price controls brought on by World War II. Because companies could not offer larger salaries, they started paying for their employee’s health insurance instead. The practice of offering employer sponsored insurance coverage quickly became the norm, thanks in part to an Internal Revenue Service (IRS) ruling that exempted employee’s from paying taxes on health benefits as well as the ability for companies to write off such costs as business expenses. The system remained generally unchanged until the passage of the Patient Protection and Affordable Care Act in 2010 (ACA). Today, one visit to the Department of Labor’s (DOL) website dedicated to the Employee Benefits Security Administration (EBSA) can overwhelm even the most seasoned HR professional. The home page alone provides links to information regarding the ACA, Mental Health Parity, COBRA, Pension Protection Act, Employee Retirement Income Security Act (ERISA) Enforcement, EFAST2 Form 5500 filing, and more.
To complicate things further, plan sponsors are also tasked with staying abreast of regulatory changes and taking on new fiduciary responsibilities concerning their qualified retirement plans, most commonly 401(k) plans. In 1974, ERISA was passed and it set the foundation for employer-sponsored retirement plans as we know them today. There have been several modifications and amendments over the last 40 years, namely the Small Business Job Protection Act of 1996, the approval of automatic enrollment in 1998, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, the Pension Protection Act of 2006, and the 404(a)(5) participant fee disclosure rules in 2012. There will certainly be more to come as federal and state governments focus their attention on the savings, or lack thereof, of the American people.
Why Even Bother?
Of the total compensation paid to the average worker in the private sector, 30.1% of employer cost was spent on benefits (Bureau of Labor Statistics, March 2013). Furthermore, the trend since 2005 is that employers are spending nearly double on health care for employees than on retirement benefits (Employee Benefit Research Institute). In addition to the hard dollar cost, there is also a significant time and resource commitment. According to the Workplace Benefits Report (Bank of America/Merrill Lynch, Dec 2013), 61% of human resource professionals report they have increased time spent on health care related activities over the last two years, and 38% report spending more time on their 401(k) plan, compared with 32% more time on hiring/firing.
It is clear that the setup and ongoing administration of an employee benefits package is incredibly time consuming and can be very costly. However, according to the Bureau of Labor Statistics, only 73% of private industry workers who were offered employer-sponsored medical benefits choose to participate, and 64% of all private workers have access to a retirement plan in which 49% of all private workers with or without access participate, for a take-up rate of 76% (Employee Benefits in the United States, March, 2013). The fact that HR departments are spending more time and resources coupled with the fact that employee benefit plans are not being fully utilized by employees can create a frustrating combination.
Breaking the Cycle
In their best intentions, employee benefits are meant to benefit the employee—and they still do. The Kaiser Family Foundation study on Employer Health Benefits cited the fact that employer-sponsored insurance covers about 149 million non-elderly people. Additionally, according to the most recent Department of Labor Statistics (June 2013), defined contribution plans cover more than 88 million participants.
The key to breaking the cycle of burdensome benefits is to develop a plan that creates a holistic and complimentary benefits package rather than allowing disparate offerings to fight for dollars and attention. Employers are starting to catch on to this idea, with 82% believing that employees would gain from access to more holistic financial services offerings, yet only 55% of employers surveyed have taken this approach (Workplace Benefits Report). Studies have also shown that overall financial well-being leads to more satisfied, loyal, engaged and productive employees (Stephen Miller, SHRM, 12/12/13).
Quality financial education is also becoming invaluable when preparing employees for their retirement. Next month, we will discuss components of an education strategy. For too long, employees and employers have mortgaged their retirement plans to pay for health insurance. This is a slippery slope to benefits management for both parties. Working with an adviser who takes a holistic approach to bringing your insurance and retirement benefits together may be able to help your company and employees break the burdensome benefits cycle and allow you to refocus on the “benefits” of your benefits package.
Trent A. Grinkmeyer, CRPC, Jamie Kertis, QKA, AIF, and Valerie R. Leonard, AIF
Trent Grinkmeyer, Valerie Leonard, and Jamie Kertis are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Grinkmeyer Leonard Financial or CES Insurance Agency. Grinkmeyer Leonard Financial, 1950 Stonegate Drive, Suite 275, Birmingham, AL 35242, (205) 970-9088.
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 authors do not necessarily reflect the stance of Asset International or its affiliates. The persons portrayed in this example are fictional. This material does not constitued a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial adviser should be consulted.