Designing the package: employers are aligning employee benefits with corporate strategies.

Job applicants are looking for more than answers about their salary during an interview. They now are asking potential employers two other critical questions: what benefits employers offer and how much they contribute to those benefits.

Benefit packages increasingly are becoming an employee recruitment and retention incentive. But rising costs, particularly medical expenditures, are forcing many employers to re-evaluate the way they design employee benefits packages. Employer costs for benefits account for nearly 30% of compensation costs, including health and other insurance, retirement plans, paid leave and legally required benefits such as Social Security, according to the U.S. Department of Labor Bureau of Labor Statistics.

As they design packages, employers are trying to accommodate the various needs of their diverse work force. Segmentation of the market, such as by geography or employer size, is one approach some insurers and benefit brokers are taking to meet these needs. In addition, employee benefit coordinators are becoming more active in the process.

"Benefits have become a big ticket item and a sore spot for almost every company," said Harriet Hankin, national director of business development for Willis Benefits Practice Group. The good news, however, is that those involved with employee benefits are becoming an integral part of the team. "Instead of human resources just being doers that occasionally get the limelight, they're now going to be part of the strategic team. That's a huge change, and the companies succeeding today are the ones with a good team of thinkers on a variety of sides, such as operating, finance, human resources," she said.

Designing a Plan

Designing employee benefits packages involves major challenges.

"Employers have to strike a balance between two big and often competing issues: attracting and retaining employees on one end and managing costs on the other," said Mike Simonds, vice president of market development for UnumProvident. Various external conditions have shifted the balance between the two over the years. "In the late '90s, the booming economy and tight labor market led the pendulum to swing to richer and more unique benefits for many groups, running the gamut from pet insurance to onsite day-care. But then the technology bubble burst, the recession materialized and the biggest benefits budget item--health care--started to rise markedly. So now, cost has become more paramount."

Defining a company's strategy is a good first step insurers and benefit brokers should take when designing an employee benefits package, said Willis' Hankin. "The strategic team needs to think through what it is they want the benefits to accomplish in order to meet the corporate goals." That, in turn, simplifies the design process. "If you know your strategy is saying that a particular benefit is the most important, or that a company wants every bell and whistle available, it helps create the design," Hankin said. Focus groups also can help study how plans will work within an organization, she added.

Market segmentation, in which people are divided into different homogeneous groups, is becoming part of some benefit brokers' and insurers' approach to better understanding employers' and employees' diverse needs. "In the beginning, it was easy to describe the worker in a nuclear family and know what everyone wanted. But there's no such thing as one-size-fits-all anymore because we're all from such different needs, and the most important thing now is that we have some choice around benefits so employees can build a package that works for them," said Hankin.

An increasing number of companies also are benchmarking their plan designs. "In order to remain competitive, most clients/prospects are becoming more educated and more cost conscious and thus are very interested in what other companies offer for benefits," said Aviva Sapers, chief executive officer of insurance and benefits planners Sapers & Wallack.

Countering Cost

An important part of aligning companies' employee benefit offerings with their corporate strategies centers on cost.

Now, more than ever, employers have to dig deeper into their pockets when it comes to employee benefits, particularly for health coverages. In 2004, employers spent, on average, about $3,137 for individual health-care coverage, and $7,289 for family coverage, according to the Kaiser Family Foundation.

"It's a huge balancing act between how employers can pass large healthcare increases on to people through payroll deductions and how much can they get away with increasing deductibles and out-of-pocket limits to mitigate 10% to 20% annual rate increases," said David Fortosis, senior health-care consultant with Hewitt Associates' Chicago office. "Increasingly, employers are being forced to do what is very unpopular--charging people more for access to health-care programs."

Increasing employee-paid contributions also is hitting retirement and investment plans. Some employers now are beginning to move away from defined benefit plans into defined contribution plans, or a hybrid of the two. "Defined contribution savings-type benefits are not only more portable, they're funded on an annual basis and don't have long-term risk implications found in more historical retirement benefits," said Emmett Seaborn, a principal with Towers Perrin. Two years ago, slightly more than three-fourths of all U.S. companies offered some type of defined benefits plan; today, only about 67% of companies offer such plans, he said.

Consumers at the Forefront

One bright spot in higher employee-paid contributions is that consumers are being offered more choices regarding their health care, investments and coverage needs.

"Companies that have to be focused on cost can't let go of the balance with their employees," said UnumProvident's Simonds. "There's not an abundance of talent out there just waiting and the cost of turnover is significant, so employers now are offering employees more choice-type products. At the end of the day, choice may not cost the employer much, but it allows them to still provide value to employees."

The rise of consumerism and consumer-driven health plans is meeting that demand. "We don't have the silver bullet that we thought we had several years ago with the shift from indemnity products to managed care. But now we're shifting to behavior-based models that focus on the consumer and the way they purchase health care, intending to help employers halt the rate of health-care cost trends," said Seaborn of Towers Perrin. There's now a greater impetus on employees to take care of themselves and their families, he added.

Health savings accounts and health reimbursement accounts are helping put consumers in the driver's seat. According to a recent survey by the Federation of American Hospitals and the American Hospital Association, 70% of employers likely will offer some type of consumer-driven health plan, such as HSAs, by 2006. Small group and individual health insurance markets are already seeing the greatest enrollment growth in these products.

Voluntary Benefits

Employers also are trying other approaches to cut costs, such as voluntary benefits. "[These] benefits help businesses with recruitment and retention, in addition to having a healthier and more productive work force," said Paul Fronstin, director of the health-care research and education program for the Employee Benefit Research Institute, a nonprofit, nonpartisan organization that provides data dissemination, policy research and education on economic security and employee benefits. In addition, voluntary benefits, which allow employees to purchase additional benefits to supplement those provided by their employer, not only are affordable but also low maintenance. Large employers, in particular, are finding these offerings protect them from having to scale back their benefits offerings--something they fear might impact their bottom line, he added. In MetLife's 2004 Employees Benefits Trends Study, the majority of employees said convenient payroll deduction was the biggest reason for purchasing voluntary benefits, along with the fact that the benefits allow individuals to enroll for insurance without a medical exam, are more convenient than shopping on their own, and provide better rates.

Dental benefits quickly are becoming one of the fastest growing voluntary benefits offered today. In addition, employers increasingly are offering benefits such as long-term disability, life insurance, critical-care insurance and vision coverage on a voluntary basis.

Recruitment

Along with saving money, employers are shaping their employee benefit packages to attract and retain personnel.

In its 2004 study, MetLife found that 65% of employees saw benefits as an important reason for staying with their employer, second only to 68% who said they were highly satisfied with their job.

"It gets harder to recruit or retain people as demographics shift, and we have less unemployment and fewer great workers, so as a result we'll start to see even more creativity around extra benefits--the ones that make the workplace a rewarding place to work" said Hankin of Willis.

Preferred Benefits

The benefits employees want in their packages have changed.

Demographics have a large hand in that shift. Baby boomers nearing retirement, for instance, are searching for richer benefits meeting long-term-care and investment planning needs. The Generation Y work force, on the other hand, is less concerned about long-term needs and is looking for a greater work-life balance, including such benefits as flexible work schedules and paid time off.

All groups have one thing in common, however: the continued demand for health coverage. In a recent study by the Employee Benefits Research Institute, 57% of employees ranked health benefits as the most important employee benefit, followed by 22% who cited retirement savings plans such as 401(k) plans. Other benefits in demand included stock options, disability coverage, long-term care, life insurance and retiree health insurance.

The majority of employers' and employees' benefits spending comes from health insurance. In fact, anywhere from 20% to upward of 50% of employees' paychecks goes to footing the health insurance bill. Double-digit health-care cost increases are taking a toll, and a growing number of employers have had to scale back on their offerings or eliminate the benefit all together.

Soaring health-care costs will continue to impact the direction employers take when designing employee benefit packages. But big changes likely won't be felt for a while. "This is a $1.7 trillion industry and we can't begin to turn that huge aircraft carrier around in less than a decade or two," said Fortosis of Hewitt Associates. "In 20 years, rumblings from corporate America and a large group of baby boomers who are retiring will be the tipping point that forces a consumer world where people can go onto the Internet and find out, for example, what doctors charge for everything."

Benefit packages also will align with changing times. For instance, some employers likely will alter their offerings to meet employees' demands for a greater work/life balance. "This may involve cutting back work hours, allowing employees to work part time, and letting companies look at adjusting retirement and other benefit programs that support these alternative staffing models," said Towers Perrin's Seaborn. He also anticipates a shift from work-life balance to more work-life effectiveness, which "blurs boundaries between work and life, creating a more fluid and flexible work-force model."

Key Points

* Employers are designing employee benefit packages to match corporate strategies, such as personnel recruitment and retention and cost control.

* Employers spent, on average, about $3,137 for individual health-care coverage, and $7,289 for family coverage in 2004, according to the Kaiser Family Foundation.

* Employers are shifting more benefit costs to employees or turning to voluntary benefits as a way to cut rising costs.

Learn More

Guardian Life Insurance Company of America A.M. Best Company #06508 Distribution: Career agents, independent agents, brokers, group representatives

Unum Life Insurance Company of America (UnumProvident) A.M. Best Company #06256 Distribution: Independent brokers and agents, corporate marketing agreements, benefits consultants, direct sales force

For ratings and other financial strength information about these companies, visit www.ambest.com.

E-Benefits

Technology is changing the face of employee benefits. Not only is the Web helping educate employers and employees about their employee benefit plans, but it's also a good self-service tool to help speed up the enrollment and administrative processes.

Cutbacks in companies' human resources departments over the past several years have taken a toll on how much education and assistance they can provide for employee benefits. Technology offers a way to outsource some administrative duties and allow employers to provide higher level resources.

"Technology is saturating the process from start to finish--from enrollment to education to claims submission--it's all being done via technology," said Mike Simonds, vice president of market development for UnumProvident. Technology is a big selling point to employers not only because it lessens the administrative burden, but also because technology can enable more effective communication of the benefits being offered, he added.

But the Web isn't the only technology that's making employee benefit plan design and education easier. Some employers also are relying on company intranets, DVDs and CD-ROMS to spread the word about employee benefit offerings. For instance, an employer may store a directory of network health-care providers on a CD-ROM for easier access by policyholders, or provide an employee's total reward statements via the intranet.

Not everyone, however, is benefiting from technology. A large portion of the population still doesn't have technology available to them, said Harriet Hankin, national director of business development for Willis Benefits Practice Group. "Many individuals still desire high-touch people they can talk to, such as through call center," she said.

While it might not be a total cure-all, leveraging technology is serving as a good stepping stone. "Three to five years from now, we'll look back on today and think we were very early in the process," said Rob Guilbert, vice president of corporate communications for Assurant Health. "Technology has a long way to go, and while it won't solve everything, it's a solution that certainly does help in the process."