2005 Employee Benefits Survey

As budgets tighten and the workforce ages, corporations have to find creative ways to balance employees' benefits with changes in demographics and lifestles.

By Maggie Rauch

OCTOBER 01, 2005 - -- An attractive benefits package isn't just a tool for recruitment and retention. When employees feel their company is invested in providing for their personal welfare beyond just giving them a paycheck, it's bound to increase their loyalty to the company, as well as contribute to their peace of mind.

Frank Gavin, New Jersey–based director of the National Education Trust—where perks include company-sponsored college trust funds for children of employees—believes that good benefits have a positive effect on performance. "You pay them well, take good care of them, and they do good work for you," Gavin says. "I give my people the best, and I can demand the best from them."

But with the combination of a slack economy and rapidly increasing benefit costs, particularly in health care, companies are finding it difficult to offer benefits that enhance the employee-employer relationship. Across the board, companies are asking employees to take more responsibility for their health and financial welfare. Our 2005 Employee Benefits Survey examines how practices are changing.

Employers are showing more interest in retirement plans that require the employee to assume the bulk of the investment risk and medical insurance plans that ask workers to carry more of the burden.

"We've found cutbacks in the kind of benefits that cost money," says Ellen Galinsky, president of the New York–based Families and Work Institute. "Fewer are providing full coverage, and there's been an increase in the amount that they're asking employees to pay. But in terms of other kinds of supports for people to work effectively and manage family or personal life, we've seen them increase or at least stay the same."

With costs rising, communication and employee empowerment are key ways companies are enhancing benefits. According to recent research from Watson Wyatt Worldwide, top-performing companies "engage consumers through information and tools, and focus on health management and lifestyle behavior change."

While anecdotal evidence indicates an interest in improving communications and giving workers more tools to manage benefits, Incentive's research shows there's room for improvement: Just 57 percent of respondents say they inform their employees of the total cost of salary and benefits, and just over half offer online access to benefits information.

Another emerging trend is customization—whether it's in financial, health or personal/family benefits, companies are looking to meet the demand for a more tailored approach to benefits. According to the Society for Human Resources Management (SHRM), 38 percent of companies are offering customized benefits packages.

For years, Gavin says, the National Education Trust has offered its employees highly customized benefits, letting them shift days off from year to year and scaling their fully funded medical coverage based on time spent with the company.

Faced with a challenging combination of demographic trends (a growing number of households with both parents employed, more workers caring for aging relatives and more demand for support in creating a fulfilling life outside of work) and economic challenges, companies are being forced to get creative with their benefits packages.

Don't Drop the Nest Egg
The 401(k) plan is the leading retirement benefit, with 73 percent of companies that participated in our survey offering one. Still, 35 percent offer a pension plan, and more than one-fifth make both available to workers.

Similar to a trend in health care coverage of asking workers to pick up bigger portions of their premiums, employers are shifting more of the risk in retirement savings over to workers. Just four years ago, says Jen Schramm, SHRM's manager of workplace trends and forecasting, nearly half of companies offered defined benefit plans, in which the employer assumes the most risk by guaranteeing a certain retirement payout. Today, only 39 percent of companies offer a defined benefit plan; more opt for defined contribution plans such as 401(k)s, to which employee and employer both contribute and the payout depends on investment performance. According to SHRM's 2005 Benefits Survey, defined contribution plans are now twice as popular as defined benefit plans.

"Retirement benefit trends are hard to define. There is so much variety in what exactly companies offer," Schramm says. "But those that are offering traditional pensions are facing difficulties, so we're definitely seeing a shift away from them." An example is United Airlines' recent decision to eliminate its pension program.

When it comes to matching contributions to retirement plans, Incentive's survey shows a nearly even distribution among four different approaches— matching 50 percent of contributions up to 6 percent of salary; matching 50 percent of contributions up to 4 percent of salary; matching less than 50 percent; and no matching.

Bob Paino, CFO of Warren Kremer Paino Advertising (WKP Advertising) says his company is among the 29 percent of companies that don't match employee contributions. "We used to offer a 401(k) and match a small percentage, but since three or four years ago, we don't fund it at all," he says. The Manhattan advertising firm dropped this benefit to save money, but it wasn't a knee-jerk cost-cutting decision. It was based on an assessment of WKP's unique employee profile. With about two-thirds of workers under 40, Paino says, retirement plans were not a top concern.

Still, Paino acknowledges that the benefit cuts his 30-employee company has instituted create a recruitment challenge. He says some prospective hires have found the salary offered them to be attractive, but have walked away because they weren't satisfied with the benefits package.

As companies ask employees to carry more of the risk in retirement planning, some are accordingly taking a more proactive role in employees' financial planning.

"The philosophical underpinnings of the system have shifted," says David Wray, president of the Profit Sharing/401(k) Council of America (PSCA), based in Chicago. "In the past, a worker would have an individual investment account, and decide how and how much to invest. At the end of the '90s, all employers did was provide payroll reduction opportunities. With mutual funds doing very well, that's what employees wanted. The biggest trend now is employers taking a bigger role. They're offering new solutions, more tailored options, professionally managed accounts. Employers are stepping up."

Stopping the Bleeding
In a 2004 survey by SHRM, human resources professionals ranked the rise in health care costs as their top economic concern and the most important overall workplace trend. In a demonstration of how severely companies are feeling the crunch of increased health care expenses, half of the respondents to Incentive's reader survey say they consider the extra cost of including a spouse and children in health coverage to be too high.

Employers don't have the option of ceasing to offer health benefits or cutting off workers' dependents; in multiple surveys, employees rank health care as their most important benefit. Instead, employers are offsetting costs by carefully adjusting plans, often increasing the burden on workers in the form of higher premiums, deductibles and copays. Paino says WKP Advertising used to pay 100 percent of each employee's monthly health care premium; now it only covers half. According to the Families and Work Institute, 40 percent of companies increased the employee-paid portion of health care premiums over the past two years.

The rising cost of health care is a leading cause of tension between workers and their employers; the AFL-CIO lists it as one of the most common key issues in union bargaining talks. As companies approach the limit of how much they can ask workers to pay, more are turning toward a solution that's much easier to put a positive spin on: company-sponsored wellness programs.

"Preventive health care programs are the number-one way organizations are dealing with health care cost increases," says SHRM's Schramm. Fifty-seven percent of the participants in Incentive's survey say their company offers some sort of proactive health improvement services, from on-site gyms to nutritional guidance.

After psychiatric treatment, the leading category of proactive health services is smoking cessation programs, with more than a quarter of companies offering help in this area.

"Clearly you can increase productivity and decrease absenteeism by helping workers quit smoking," says Sharon Carothers, vice president of program development for the American Legacy Foundation in Washington. "It's a relatively cheap benefit with huge rewards." Programs that help smokers quit, she says, have historically faced the challenge of passing the short-term return on investment test. While it's generally accepted that habitual smoking is likely to decrease lifespan, the more immediate risks—and by extension the more immediate impact on the bottom line—have been more slowly accepted. A 2004 study by the Health Enhancement Research Organization, based in Birmingham, Ala., confirms that a short-term effect exists, with smokers' annual medical expenses 15 percent higher than non-smokers'.

Carothers notes that companies' needs vary and points out there are a variety of choices in smoking cessation programs, ranging from coverage for medications like Zyban, to call-in support or counselor-led group programs. Organizations offering free help via phone, like the North American Quitline or the Mayo Clinic's hotline, can offer more robust services, like coordination with a traditional health care program, to employees of companies that purchase a plan.

Companies also are beginning to use wellness incentives, rewarding workers for making healthy lifestyle choices. IBM says it has spent $25 million on a program that lets employees win products and cash rewards for exercising regularly or quitting smoking (Incentive, September 2005). The company's director of well-being, Joyce Young, says workers who exercise file $350 less in annual claims. The trend is attracting suppliers: Carlson Marketing Group in Minneapolis recently rolled out a Web-based wellness incentive solution called MyHealthLink (for details, see page 12 of this issue).

Companies that provide employees with tools and information to take care of their health and manage their costs, can realize financial benefits. According to Watson Wyatt, a consulting firm based in Arlington, Va., their median health cost increase should be 5 percent next year, compared to an increase of 15 percent for companies that don't take a proactive role in employee wellness.

Family Matters
While pressure on corporate productivity increases, for many workers demands at home are growing as well. In 60 percent of two-parent families, both parents are employed, according to The Families and Work Institute. Still, almost one-third of respondents say they don't offer any family-friendly benefits.

When they are offered, family-friendly benefits most often take the form of policies that allow workers to create schedules that let them meet outside obligations. Flex time is offered by 47 percent of respondents and telecommuting by 31.5 percent.

"For the large part of the economy that's knowledge-based and less place-centered, flexibility can work for both the employer and employee," Galinsky says. "I don't think it should be treated as a perk, which makes it sound like it can be easily taken away. It should be a strategic business decision." Galinsky says an added benefit is that companies that offer employees flexibility in where and when they work will be most resilient after a disaster.

A leading concern among workers with dependents is health care, and with costs growing, that benefit is suffering. Although half of the respondents to Incentive's survey say the cost of including dependents in medical coverage is unreasonable, most still offer health care for children, but there's been a slight trend away from that: According to the Families and Work Institute, since 1998, the percentage of companies that don't pay any insurance premiums for family members has increased from 13 to 17 percent.

Demographic shifts also are influencing family-friendly benefits. An aging population means more workers are caring for elderly relatives, and therefore need some kind of support from employers. In a 2004 SHRM survey, human resources professionals listed the growth in the number of workers with eldercare responsibilities as the second most significant demographic trend, followed directly by the increase in the number of employees with both childcare and eldercare duties. As much as 35 percent of workers have some kind of daily responsibility for someone over 65, according to the Families and Work Institute.

Despite the increasing need, less than two percent of respondents report that their company offers eldercare, but research from the Families and Work Institute indicates that low-cost forms of assistance are growing. In 1998, the Institute says, 23 percent of companies provided workers access to information about services for elderly family members; over the past seven years, that has grown to 34 percent.

Galinsky expects the increase to continue. "First there's the simple demographic shift, with more people caring for a relative," she says. "And people in decision-making roles are more likely to have eldercare responsibilities than childcare. Also, among the working population, this is just as likely to affect men as women."

Schramm is more pessimistic: "Demographics point to the demand for eldercare increasing, but we don't know if that will translate to employers offering major assistance on a large scale. If it's going to make it harder to pay for these other benefits that are already offered and are hard to cover, companies will be hard-pressed to add serious coverage."

Of course, including elderly parents in a worker's health plan is likely to be prohibitively expensive and usually unnecessary. But offering some support to employees who care for an aging relative doesn't have to carry a huge cost. Beyond offering scheduling flexibility, a company can connect weary workers to information and resources available locally.

Family-friendly benefits represent an opportunity to communicate to employees something about the company's internal brand. The National Education Trust, for example, opens and contributes to college funds for its employees' children. Full-time employees get larger contributions, and when a worker leaves the company, his child's fund is redistributed among co-workers. The company also gives workers flexibility with their vacation time.

"They can save their days off for next year, if they have a big family trip or something," Gavin says. "Or they borrow days to be made up later."

Have It Your Way
As in the economy at large, customization is becoming the new standard in employee benefits. Facing daunting new costs, employers are getting creative about finding low-cost ways to make the work environment, and life in general, more pleasant for employees. Companies will need to find ways to offer benefits consistent with their corporate goals and appropriate for their employee demographics. For some that means access to alternative health care like acupuncture and massage, while for others that means pet insurance or travel discounts.

At WKP Advertising, workers get every other Friday during summer off, and the office closes during the week between Christmas and New Year's Day. "I think a lot of them appreciate that time off more than they do their bonus," Paino says.

Paino is on to something: According to the Families and Work Institute's 2005 National Study of Employers, flexible work schedules are the second most important benefit to workers after health care. Flexibility doesn't have to mean sacrificing productivity. Paino says his employees understand that they must get their work done, and they know when to give up a day off to finish a project.

Education, training and career development are emerging as popular benefits, perhaps because they are so clearly mutually beneficial to employee and employer. Compared to the less than 50 percent of our survey respondents who offer flex time or telecommuting, 60 percent offer some form of education assistance, and 21 percent offer career guidance. Sabbaticals are included by a comparatively small 7 percent. But with the increased focus on work/life balance, an aging workforce and increased exposure to European colleagues and their month-long vacations, look for these exploratory breaks from the corporate grind to gain in popularity.

The ability to adapt and to consider a company's unique needs and opportunities is key to keeping workers happy with their benefits packages. At the National Education Trust, Gavin says he has shopped around for the best insurance providers in different categories. As a result, employees have insurance through four different providers. Additionally, the care covered for each employee varies depending on a scale that takes into account their working hours and tenure with the company. While one might assume that would be confusing, this approach allows the company to pick up 100 percent of employees' premiums and to keep copays down to $10.

No monthly premiums and just $10 for an office visit? Schramm says this is the type of simplicity most workers seek: "Most employees want really simple things—job security, health and safety, and some autonomy over their time."