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Healthcare Costs Rise as Retirement Dollars Decline – Benefits Spend Trends

Healthcare Costs Rise as Retirement Dollars Decline

Healthcare Costs Rise as Retirement Dollars Decline. Employee benefits have changed dramatically since the early 2000s, and they continue to evolve. Recent research from Willis Towers Watson indicates that evolution is expected to continue as employers revise their benefits offerings to attract and retain key talent while addressing the diverse desires and priorities of today’s workforce.

How Benefits Dollars are Being Spent

Willis Towers Watsons’ analysis considered employer costs as a percentage of average pay for defined benefit (DB), defined contribution (DC), post-retirement medical (PRM) and active healthcare plans from 2001 to 2015. Overall benefits expenses relative to pay increased by 3.5 percentage points over the period. However, pay raises have not kept up with the rising cost of benefits.

Not surprisingly, healthcare costs rise for employers and employees. Employers’ active health care costs doubled, growing from 5.7% to 11.5% of pay. While their research focused on employer expenses, Willis Towers Watson observed that workers’ premiums and point of care costs went up significantly over the period as well.

On the retirement benefits front, however, employer costs declined, largely due to the shift from employer-paid defined benefit to mostly employee-funded defined contribution plan offerings. Total retirement costs (which includes DB, DC and PRM expenses combined) shrank 25% from 2001 to 2015, from 9.1% to 6.8% of pay. PRM values fell one percentage point over the period, as this benefit has mostly been eliminated or subsidies reduced.

The research also showed a marked shift in benefits spend over the years. In 2001, active healthcare costs accounted for two-fifths of benefits, whereas retirement made up the remaining three-fifths. In 2015, retirement benefits comprised a third of the cost, and active healthcare accounted for nearly two-thirds of employers’ total benefits spending.

Again, most employers have reduced their retirement benefits costs by closing or freezing their traditional DB plans and replacing them with DC or hybrid DB/DC plans. In 2001, 45% of employers offered a DB plan to new hires, compared to just 7% in 2015. However, the percentage of organizations offering a DC plan rose from 41% to 76% over the period. What’s more, while most employers contribute more to a DC plan after closing a DB plan, these contributions typically don’t equal the value of the lost pension.

To that end, retirement costs vary widely by employer, depending on the benefits offered. For DC-only offerings, the cost was 6.2% of pay. For employers offering pensions — traditional DB or hybrid DC/DB offerings — the average retirement cost was higher: 11.2% and 8.9% of pay respectively.

Employees’ Take on Benefits Spending

Another Willis Towers Watson survey of employee attitudes suggests that while employers are spending more on health benefits than retirement offerings, their focus may not be in line with the needs, preferences and priorities of today’s workforce.

Of course, workers value both health and retirement benefits, but many are worried about their finances and meeting short- and long-term obligations. These concerns impact employers, too, resulting in missed work days, errors on the job, and lost productivity.

Additionally, when asked how they would allocate employer benefit dollars, employees of all ages indicated that their retirement plan was a top priority, followed closely by healthcare.

Baby boomers (66%), Gen Xers (63%) and Millennials (59%) were all willing to allocate more of their pay for a more secure retirement benefit.

So what does this mean for employers? Understanding what employees want can help influence benefits spend. As such, employers have an opportunity to deliver more value by aligning their offerings with employees’ priorities and concerns. Providing more choice and flexibility can help, too, i.e., adding supplemental insurance and other voluntary benefits that inherently provide more security, flexibility and convenience.

However, more choices can potentially confuse employees, so it’s also important to offer tools and support to help them make decisions. These tools should be easy to access, engaging and provide real-time support to help employees navigate complex choices and select options that work best for them.

In addition to offering more flexible benefits that are better aligned with employees’ priorities, consider also forging a stronger connection with them on a personal level. Fostering trust and building relationships can go a long way toward helping your workforce feel valued and appreciated — which can be very rewarding in itself.

Healthcare Costs Rise as Retirement Dollars Decline – Benefits Spend Trends by Robyn Kurdek

Robyn Kurdek

Robyn Kurdek

Freelance writer with nearly 2 decades of financial industry experience, with niche expertise in the defined contribution (DC) industry. I also have defined benefit (DB) plan knowledge. I write all types of content for retirement plan participants, sponsors and advisors, including web copy, newsletters, white papers, fact sheets, blog posts, financial wellness articles, and more. "I speak DC."
Robyn Kurdek
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