Natural Selection.

With seminal changes afoot in technology, insurer marketing, employee turnover and lifestyles, workplace benefits may look a lot different even five years from now.

The decisions employers face about employee benefits today are tougher and more numerous than ever. But the options that benefits providers offer and the choices employers make over the next five years could lead to greater simplicity for employers, as insurers and other third parties take over enrollment, administration and even employee education.

Customers--both employers and employees--drive changes in the benefits market. Many employers today seem willing and eager to hand over their benefits programs to qualified parties. Employees, too, seek improvements to the system that are changing the kinds and amounts of benefits they receive.

"It's a natural state of affairs," said Jay Dorsch, an attorney and chairman of the Employee Benefits & Executive Compensation Department at the law firm Cozen and O'Connor, Philadelphia. Employees are asking for benefits that better fit their needs, and employers are looking to escape from the paperwork burden and at least some fiduciary responsibility. But benefits designed for employees who stay with a company for 20 or 30 years are no longer relevant in today's work environment. "Over the next few years, you'll see greater movement toward participants being more legally responsible for decisions about their own benefits programs," Dorsch said.

A paper released in December by Aetna Group Insurance came to four main conclusions about how employee group life benefits are likely to be handled five years from now:

* Employers will continue to shift more responsibility to employees for selecting and paying for benefits.

* Insurers will customize group life insurance and other products to better meet the needs of the work force.

* Insurers will partner with employers as benefits educators through Web sites and other tools.

* Insurers will connect directly with employees through online enrollment and administration, freeing the employer from the role as middleman.

The dynamics of employee benefits stem from the battle among employers to recruit, motivate and retain the best possible talent, and reward systems are one of the prominent ways to address employee needs, said Stephen McGivney, executive vice president of Aon Consulting and head of its Northeast region. Aon recently completed its fourth annual nationwide study, "The United States @Work." Based on results of 1,800 phone interviews with employees, the study measures work-force commitment. Its work-force commitment index stood at 98.8 for 2000, down from the benchmark of 100 in 1997 and from 100.3 in 1999.

Current Landscape

McGivney said employee choice already has become prominent on benefit menus of today. Employers usually pay for all or some of health care, retirement plans, term life insurance and disability insurance. Employees usually pay entirely for long-term-care insurance with after-tax money through payroll deduction, though they gain some savings from purchasing collectively, he said. Employers usually make universal life insurance available on a voluntary basis through payroll deduction, and the policies are portable. When they share in the costs, employees often have the choice of high-, medium-, and low-cost health plans, he said. Offering these choices helps employers control their costs, too.

Overall, employers still pay the lion's share of medical plans, but how much they subsidize varies greatly by industry, McGivney said. Corporations that collectively bargain with unions take on more of the costs than those with nonunion employees. High-tech companies, which compete for a small, highly skilled pool of labor, typically provide full basic benefits packages and often offer ancillary benefits. These companies' more sophisticated technology, including Internet tools, makes it easier for employees to communicate, enroll and stay informed without lots of paperwork, McGivney said.

On the other side are employees in the service sector, manufacturing and professional services, such as law firms, in which employers are not as generous, but they still pay more than half of the costs.

McGivney said larger companies tend to offer a larger basket of benefits, but he saw no regional differences in benefit offerings. Tom Parciak, vice president of the health group at Aon Consulting in Somerset, N.J., said companies located in urban areas tend to offer more health-plan choices than their rural counterparts, because they are closer to clusters of doctors, hospitals and other medical service providers.

About two-thirds of employees are covered by employer-sponsored health plans, said Jonathan Nemeth, vice president and actuary at Aon Consulting's Somerset, N.J., operation. Some are uninsured because they decline to enroll in their employer's plan; the ones who decline tend to be young, immigrants or part-timers, he said. Workers whose spouses already have family coverage also often decline to enroll.

In the next five years, benefit packages will be more competitive, cost-efficient, tax-advantaged, flexible and individualized, McGivney said. "We'll see additional benefits that meet those principles and that will allow employees to experience more savings and choice," he said.

Voluntary Benefits

One change already under way is the expansion of voluntary benefits as employers seek ways to expand benefit offerings without expanding costs. Employers around the country are introducing coverages such as auto, homeowners, long-term care, dread disease and even health insurance for pets, McGivney said. Employers can pool their employees to negotiate premium discounts of 10% to 15% annually from highly rated carriers, and they can offer employees the convenience of paying through payroll deduction.

To take advantage of that trend, Newark, N.J.-based Prudential Financial expanded its group benefits business in spring 2000 and changed the name of its Group Life and Disability unit to Group Insurance. Prudential sold its health-care insurance business, Prudential Healthcare, in 1999 so it could focus on nonmedical group products.

"Health care is no longer an insurance product, but rather one of managing doctors, networks and hospitals," said Ann Bossi, president of Group Insurance. She said insurance is about evaluating, underwriting and managing risk, areas in which Prudential has strong capability.

In 2000, Prudential was ranked No. 1 in new sales of group life insurance, according to a Limra International study. It climbed to No. 5 in new sales of group disability, with a 47% increase over 1999. Life sales rose in group universal and group variable universal lines, which employees buy at their own expense to supplement base coverage provided by employers. The same is true for disability; employers pay for core coverages, typically to replace 50% to 55% of income, and employees buy more to bring the coverage up to 60% or 65%, Bossi said.

Long-term-care products as a voluntary benefit also are growing in popularity as baby boomers and their parents age. "We had a very large increase in LTC sales, but we were starting from a very small base," Bossi said.

"We've also seen a significant increase in requests for proposals."

Voluntary benefits are growing predominantly among large and jumbosized employers-those with more than 1,000 employees. But interest is also growing among smaller companies, Bossi said. "The interest is pretty well throughout the country, but perhaps more on both coasts," she said. "We're seeing a lot of new activity in the Southwest and the Southeast, and we're starting to see things pick up in the Rust Belt." The Rust Belt includes Illinois, Indiana, Michigan, Ohio and Pennsylvania and is so named for the oncethriving industrial region that became noted for the exodus of the manufacturing industry in the 1960s and 1970s.

A newer trend of increased interest is emerging in the public sector, which Bossi said is "copying" the kinds of benefits offered in the private sector. She said there is a possibility that more midsize employers will offer voluntary benefits, because better technology will enable smaller companies to offer group products. "With Web-based platforms, there's a good opportunity for employers to offer benefits without the involvement of human-resource departments," she said. "That had been a stumbling block."

Prudential has devoted considerable resources over the past few years to develop its e-commerce capability, and it is well-situated in technological development, Bossi said. In July 2000, Prudential made a private-placement investment of an undisclosed amount in RewardsPlus of America Corp., a benefits-marketing and administration firm based in Baltimore that services accounts on the Internet. "We're using it to offer group auto, group homeowners, life insurance and disability," Bossi said. "We don't underwrite these, but we partner with vendors."

Technology Needed

Better technological capability will likely be a necessity in coming years for any players in employee benefits. Willis Inc., a worldwide insurance broker and consulting firm, recently rolled out a benefits technology it calls "The Willis Experience." The technology enables efficient client management; connections to carriers for product procurement and renewal processing, analyses and data mining; and setup tools for benefits administration and online enrollment services. It also helps employees communicate with plan representatives about benefits.

"Our overall strategy is to create a site with a specific page for each employer," said Terry Warren, operations leader for the benefits practice. "From that, employers can access a number of tools and services we can offer them, and we can reach employees through their employer's intranet."

It's important to develop this kind of capability, because employers are looking for ways to give a better experience to their employees, to make information more accessible and available, Warren said. A second reason is that as businesses seeks budget cuts in a slower economy, human-resources departments may strain to keep up with serving employees. Warren said Willis had received many requests from human-resources departments to find ways for the employee to perform self-service. "The other factor is that we see these things coming along and want to be certain that our clients have access to them," he added.

Willis hopes its online service will "overshadow and outserve" smaller independent agencies, Warren said, but online capabilities are available to most employers, and therefore through agencies of almost any size. "The service will become common and standard in the next few years," he said. "They're widely available in the marketplace today from a variety of sources. We're developing with other partners, and some we're developing ourselves, so we're putting together a unique combination of services."

One partner is BenefitPoint, a San Francisco-based firm that developed a platform over which brokers can interact with insurers and clients. Many national brokers have adopted that platform. Another partner is Ultralink, based in Los Angeles, which provides online enrollment capability.

About 60% of employed Americans have Internet access either at work or at home, Warren said, so benefits providers are not so concerned about missing contact with some employees. "If you're McDonald's, communicating with employees might be difficult, unless they have Internet access at home," he said. "But if you're a manufacturer with 300 blue-collar employees, there's no reason you can't give them a kiosk. A lot of companies are already doing that. Some still have to use the telephone. So whatever needs to be done, we'll do."

Health Plans on the Move

The most dynamic changes are likely to come in health plans, said Aon Consulting's Nemeth. "In five years, they could be radically different," he said. Those changes could be driven by better technology for enrollment, administration and education as well as by advances in medical science. Capability in genetic engineering could increase, and breakthroughs in drug therapies could occur. Those advances will likely continue to outpace the ability of the legal and regulatory systems to react, Nemeth said. Added Aon's Parciak: "You could see drugs crafted to an individual's DNA. We could start treating infants for diseases they'll be prone to 50 years into the future."

The structure of employee medical benefits may be easier to predict than medical science. Nemeth said larger employers probably will be able to offer multiple health plans from several providers, including coverage for alternative medicine. Employees would no longer be stuck with accepting or rejecting one plan. Nemeth also predicted the emergence of "hybrid models," which would allow employees to select individualized levels of such health-plan components as amount of coverage and deductibles.

While some observers have posited that employers will move toward a pure defined-contribution approach for health insurance, both Nemeth and Parciak were skeptical. In a pure approach, an employer would give an employee a predetermined amount for health coverage--say $5,000--and would then be out of the business. They said that shifting that amount of decision-making to employees could detract from their productivity and could lead to other problems if employees later claim they did not understand what they were doing.

"There's still some fiduciary liability;" Parciak said. "Some is defined by ERISA [the Employee Retirement Income Security Act of 1974]." Also, employees, especially if they are represented by unions, may not allow employers to adopt a pure approach, Parciak added.

From his legal vantage, Dorsch said more responsibility will fall on employees over the next five years, particularly with respect to 401(k) plans. "Within the law, there's always been and continues to be a concern on the part of employers as to whether providing advice or guidance in the investment arena would make them a fiduciary," he said. "The more you provide, the greater the chance you become an ERISA fiduciary."

Dorsch said employers want to educate employees to make the most informed decisions possible, but they are afraid to step too far over that line. But in the next five years, he said this matter "will be opened up and become a much easier process.

"The law will evolve to the point it's much easier for employers to provide and make investment information and guidance available to employees without concerns about becoming a fiduciary," he said. Dorsch added that employers today have fiduciary responsibility to offer employees a minimum number of investment options and to monitor their performance.

Employers may delegate their benefits decisions, including those about health plans, long-term care and disability income, but they must choose a third party that is qualified. "You can't just choose a friend from the country club," Dorsch said. That applies to enrollment and administration, as well. Ultimately, they are the employer's responsibility, he said.

Like Nemeth, Warren of Willis said a hybrid defined-contribution model is a trend that will probably grow. "I don't think employees will have unlimited choice, but they will have a wide variety," he said. "Employees will have to educate themselves, and we think the Internet will be a way in which we can enhance that process."

Warren predicted that employers, plan providers and administrators will all focus a lot of attention on controlling the costs of medical plans. Health maintenance organizations and preferred-provider organizations have squeezed costs out of the health-care system over many years, but now those organizations are raising rates. "It's still a big issue for employers," he said. "Defined contribution will be of interest, but other strategies will emerge to deal with this."

To help employers in that endeavor, Willis has developed WillisMed, a Web-based, proprietary product, with an outside firm to help employers understand where and how their dollars are being spent on medical care. Through this analysis, employers can make plan-design decisions that help control their costs, Warren said.

"Health care is a complex question to address," Warren said. "Anybody that has an easy solution to it doesn't understand the problem."

Alternative Approaches

McGivney said he expects "self-directed medical plans" to become popular. Under this idea, an employer gives employees money for health care. Employees invest the money in a special account and direct the investments, and they choose from a menu of carriers provided by the employer. Younger employees, who don't access the health system often, may choose to buy high-deductible coverage and use the rest for savings, home improvements or vacations. A drawback to this type of plan is that employees might be taxed on that money.

Medical savings accounts, authorized by Congress in 1996 for tax-favored treatment, could play a big role in defined-contribution plans of the future. Congress extended for two years the original four-year pilot program, but federally tax-favored medical savings accounts are available only to companies with fewer than 50 employees or the self-employed. Larger companies may offer medical savings accounts, but the accounts are not sheltered from federal tax. Nemeth said many firms that specialize in medical savings accounts have made the plans more attractive by negotiating discounts with vendors.

Employees also can expect to see more of integrated disability management, the programs insurers are developing to coordinate care and quickly return the disabled to work after an injury. "You'll see a trend toward companies looking at their absences in total and reducing the number of them," Bossi said. "Absences are one of the hidden costs of management."

Voluntary benefits could expand beyond traditional offerings into areas that are not regulated, such as roadside service and concierge. Find/SVP Inc., a global advisory and research service based in NewYork, last year developed a turnkey program called "Live AnswerDesk." It provides immediate question-and-answer programs featuring personal expert assistance for Web sites, membership clubs, employees and other organizations as a loyalty and retention benefit. It can answer questions about booking a flight, car repairs, vacation planning, hair salons, concert tickets and much more. "Their marketing pitch is that if employees are worried about oil changes, they're not busy working," Nemeth said. "And some people work long hours."

Pay vs. Employee Benefits
A recent study including 1,800 phone interviews with employees
showed a majority -- particularl older employees -- would rather
have greater choice of benefits than an increase in pay.
Greater choice of benefits  56%
More take-home pay          44%
Note: Table made from pie chart
Employees who would prefer more benefit options to more pay,
broken down by age groups
Age       Percent
18 to 29    49%
30 to 39    54%
40 to 49    58%
50 to 59    64%
Source: Aon Consulting Work-Force Commitment Report 2000
Note: Table made from bar graph