An employee benefits fix: defined contribution designBlog added by Philip Eide on February 6, 2012 -

Philip Eide

Shaker Heights, OH

Joined: December 12, 2010

Nearly 20 years ago we co-sponsored a think tank outside of Philadelphia to discuss the future of insurance and benefits. It was after the debacle of the Clinton health plan in 1993. It seems appropriate and fitting to renew these discussions as the insurance and benefits industries grapple with continued rising costs and the federal health care reform law.

The problems

While there were a variety of problems facing the insurance and benefits marketplace, the think tank identified seven problems at the forefront:

1. Market segmentation

The lines of separation between core and voluntary benefit plans were no longer clear because all benefits were becoming voluntary. Traditionally these plans were divided into:
  • Core benefits (true group plans), i.e., health, dental, vision, long term disability, term life insurance, accidental dismemberment

  • Voluntary plans (worksite payroll deducted plans), i.e., short term disability, accident, cancer, universal life, critical illness, legal plans, etc.
2. Skyrocketing premiums

Employers, and specifically the CFO, were no longer accepting the skyrocketing increases in the premiums for health insurance coverage. There were no budgetary controls and the double digit increases were unacceptable.

3. Overburdened human resources

HR departments had become overburdened with the process of selecting benefit plans and the employee education, communication, and data management processes — as well as the claims and eligibility of new hires among other benefit related responsibilities. Many felt that the HR departments function should be hiring, training and retaining employees.

4. Multiple enrollments

Given the market segmentations — core benefits, voluntary and retirement plans — the employers and employees often faced three separate enrollment periods and effective dates. The variety of choices, and the brokers representing the plans, were vying for the employers’ and employees’ invested benefit dollars.

5. Tax advantaged plans

The introduction of tax advantaged plans, such as Section 125 POP plans, medical, dependent care, and transportation reimbursement accounts — while potentially beneficial and cost-saving for the employer and employees — were often confusing and generated penalties. In addition, these plans often required an additional TPA for managing the plans.

6. Confused employees

The enrollment process had become a nightmare. The employees were confused and did not understand their choices. There was little or no method to show employees how the various plans integrated. Though only in their developmental stages, and as a factor in reducing the health insurance and workers’ compensation plan costs, employee consumerism and wellness initiatives were gaining acceptance. The major questions about these plans seemed to be: What is the ROI and how are employees provided incentives for participation and results?

7. Broker involvement

Much like the benefit plans mentioned in above, brokers generally offered either core benefits or voluntary/worksite plans — not both. Most of the voluntary/worksite brokers represented one insurance company and were regulated as though they were captive agents.
A solution

While in the think tank, we discussed each of the seven problems above and came up with a number of possible solutions for each. However, we only developed one line of discussion that seemed to embrace all seven with one solution. This was a defined contribution design, sometimes referred to as full flex or cafeteria plans.

Definition of Def Con

Def Con is an employer sponsored employee benefit plan that stabilizes the annual benefit budget paid by the employer by offering the employees a fixed dollar/credit amount to support the employee’s self-directed benefit choices and portfolio.

Employees can add personal funds through payroll deduction for added risk protection to meet their needs. Employers, working with their brokers and consultants, select a menu of benefits and allocate a credit pricing value to these choices. Benefit eligible employees are provided an all inclusive one time per year education, communication and enrollment period where they are empowered to make informed and integrated decisions.

Solutions to the above problems

The following briefly points out the solutions Def Con provides for each of the above seven problems:

1. Market segmentation Def Con categorizes all benefits as voluntary. The employees select the plans, programs and services they and their families need within their price points. Credit price values may differ from the actual dollar cost.

The credit price values are assigned to each different plan, program and service. This differentiation in pricing can be utilized to create intentional migration from one plan, program or service to another.

2. Skyrocketing premiums

While Def Con cannot have an impact on the year-by-year premium increase, it does permit the CFO, or financial decision-maker within the employer's operations, to budget the amount they will spend on benefits year-by-year. Because the employees see the credit or dollar cost of the benefits, they may become better consumers.

If multiple carriers are utilized within any given category of benefits, there may be some consumer driven pricing pressure on the insurer.

3. Overburdened human resources

The HR department can substantially reduce the time involved in the benefits decision-making process and return to hiring, training and retaining employees. HR departments, working with the CFO, should be encouraged to focus on selecting qualified broker/consultants and capable enrollment companies for building and delivering a menu of benefits to meet the employer's / employee's needs and price points.

4. Multiple Enrollments

With the possible exception of retirement plans, the entire benefit plan should be enrolled and share one effective date. The education, communication and enrollment process is scheduled and presented at a time convenient to the employer and employees. A capable enrollment company is selected that has no financial incentive to promote one plan, program or service over another.

5. Tax advantaged plans

As long as they remain available under IRSC regulations, these plans provide an opportunity for employees to enjoy a reduced net cost for qualified benefit plans, out-of-pocket medically related costs, dependent care and transportation costs. In addition, the employer also enjoys savings by the reduction in taxable payroll.

The enrollment company that is selected must have the capacity to thoroughly explain these plans to the employees and provide the employer proper documentation. These tax advantaged plans fit perfectly into a Def Con design.

6. Confused employees

The above solutions to problems one through five combine to take most of the confusion out of the employee's decision-making process. The selected enrollment company must have the capacity to not only educate and communicate during enrollment, but offer employees and the employer an ongoing capability of assisting with questions and concerns on a timely basis.

7. Broker involvement

For Def Con plans to gain traction it is imperative to assist brokers in gaining an understanding of the Def Con plan design as well as to financially justify their implementation. A well-orchestrated education process should be initiated to gain an understanding in the brokerage communities and among the insurers. The inherent value to the employers and employees must be understood.
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