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This is in response to Should We Give Employees What They Want?

Wednesday, October 5, 2011
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First, let me start by confirming that I don't believe employers GIVE employees anything. That is, the cost of benefits, whatever form or combination they take, are part of total rewards.  

Second, there are a many benefits where the actual cost to deliver the benefit exceeds the perceived value to the employee. A significant part of your issue is certainly the difference between current and future valued benefits.

But, it may well be a function of how a sizeable proportion of employees "mis-price" the value of benefits. That's not a surprise. A number of benefit consulting groups have tools designed to tease out these differences so that the plan sponsors can leverage the differences in design decisions.

For example, few employees know the cost of health coverage, or what the cost would be to them to purchase coverage as an individual. Let's say single coverage in the employer plan costs $4,000 a year. Assuming 75 percent is paid by the employer, 25 percent is paid by the employee, too many employees will conclude the cost is $1,000, where the total cost is $4,000 and the impact on the employee's paycheck is maybe $650 (after-tax).

And, won't they wonder what happened to the money when $4,000 shows up on the 2012 W-2 with no explanation whatsoever.

Anyway, to replace that coverage through an individual policy, the same employee would likely pay 20 to 40 percent more because of the loss of the group pricing (or even more if the individual is, say, age 50+), and, maybe another 25 percent to 40 percent more for loss of the tax preferences on the coverage.

So, using 33 percent both times, $4,000 * 1.33 * 1.33 = $7,000+ in taxable income, to have $5,300 left to buy the equivalent coverage. Bottom line, their out of pocket cost of $650 seems very expensive, when the true cost, in salary equivalents, is likely to be > $7,000.  

Third, I too believe the right answer is flexible benefits, where the employer defines the contribution they feel they can afford to make towards the cost of benefits, and allow the employee to allocate those monies across a menu of benefits and perquisites.

Problem is that too many employers still have a defined-benefit mentality when it comes to welfare benefits and perquisites, where those employees with, say family medical coverage, have come to expect a higher level of company financial support where they enroll dependents for coverage.

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So, once health reform is fully implemented and affordability is redefined in terms of single employee coverage, expect to see more and more employers embrace both defined contribution/flexible benefit structures, high-deductible health plans, and increased choices and alternatives for workers -- to include more and more voluntary benefits and perquisites.  

Fourth and finally, I believe the "solution" to your issue lies in effective deployment of behavioral economics tools and concepts. An old, old axiom of mine, is that if you give employees a choice of benefits, there is only one certainty, some will make the wrong choices.

The concept in nudge or "libertarian paternalism" is appropriate here where, we know, the individual should prioritize their spend on disability coverage before pet insurance. You can create a choice architecture that is designed to encourage them to eat the vegetables before dessert. ... I have done a number of presentations and have extensively studied the application of behavioral economics to benefits -- including a recent presentation at the Academy of Behavioral Economics at UCLA just a week ago. If you would like to know more or discuss, feel free to contact me at your convenience.  

Jack Towarnicky 

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