Trading Pay for Benefits

A recent survey indicates an increasing fear among employees that a comfortable retirement may not be in the future. To help assuage that fear -- and the need for some predictability -- HR leaders need to step up their educational efforts and tools, as well as consider some creative benefit strategies.

Monday, March 26, 2012
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Call it a sign of the times.

According to a recent survey from Towers Watson, an increasing number of American workers say they are willing to trade some pay for more secure and generous retirement and healthcare benefits.

That's not a surprise, when you consider the historical trends.

Employers, faced with rising healthcare costs, have asked employees to increasingly pay more for healthcare-benefits coverage, as they also look for ways to reduce coverage for retirees not yet eligible for Medicare.

At the same time, traditional defined-benefit pensions have virtually disappeared from the private sector, replaced by defined-contribution plans such as 401(k) plans -- a much more challenging scenario for employees thrust into the role of managing their retirement plan.

"Since the economic crisis, employees have been paying much closer attention to their retirement readiness, and many are willing to look at new ways to balance their mix of pay and benefits," says Kevin Wagner, an Atlanta-based senior retirement consultant at Towers Watson. "Unfortunately, that probably will not happen in any significant way."

Wagner explains that the survey results may reflect employees' first-hand experience with financial-market volatility, continuing worries about the economy (despite some positive recent signs) and fears of future benefit cutbacks.

"Workers, especially older employees, may also be reeling from declines in their retirement-account balances as well as home values due to the financial crisis," Wagner says. "As a result, retirement security has become significantly more important to them."

According to the Towers Watson survey of more than 9,200 workers from non-government employers with workforces of 1,000 or more, more than two in five (44 percent) are worried about reductions in their retirement benefits over the next two years.

More than half (55 percent) are willing to pay a higher amount from each paycheck to ensure they have a guaranteed retirement -- compared with 46 percent just two years ago.

In addition, nearly three-quarters (73 percent) are concerned about higher out-of-pocket health costs and co-pays over the next two years, compared with 67 percent in 2007.

And half of them say they would trade a portion of their pay to ensure access to healthcare benefits if they retire before they are eligible for Medicare benefits, versus 40 percent in 2009. Overall, 53 percent say they would be willing to trade a portion of their pay in return for more generous benefits.

The survey found that the growing interest in retirement security is not limited to older workers, as some of the most dramatic changes in attitudes toward risk, rewards and security trade-offs have been among younger employees and those with defined-benefit plans.

Among defined-benefit-plan participants younger than 40, for example, the segment willing to pay for a guaranteed retirement benefit jumped by nearly 70 percent, from 39 percent in 2009 to 66 percent in 2011.

"It really shows that we have arrived at what could be called a day of reckoning," Wagner says. "In the past decade, there has been a marked decrease in retirement-program benefits in general, and now we are beginning to see the expiration of grandfathering of defined-benefit plans and a reaction to the 'do it yourself' retirement system replacing those plans."

Jim Eldholm, president at Business Benefits Insurance, a benefits broker in Andover, Mass., says the survey results are expected in the wake of our economic woes.

"There is a tendency about what you can lose versus what you can gain," he says. "The biggest challenge for employers is employees often have no idea how much it costs to provide health insurance."

As a result, Eldholm says, offering to give back some portion of compensation for improved health and retirement benefits while understandable, is unrealistic.

"They may say they will give up income for better health benefits, but they are thinking $30 a month," he says. "It would take significant reductions in salary to meet the cost of current healthcare benefits."

Despite the doom and gloom, there are ways in which employers can try to mitigate any morale issues indicated by the survey results.

Since employees are clearly becoming more interested in adjusting the balance between financial risk and retirement security, Wagner says, employers need to seek ways to possibly help lessen their worries. He anticipates the insurance industry will continue to develop products that are designed to meet that desire for security -- and he expects HR leaders will target some of their total rewards budget into offering such programs to their employees when feasible.

Along those lines, John Stanley, chief marketing officer at Transamerica Employee Benefits in Cedar Rapids, Iowa, says "it's no surprise that we are seeing a surge in the voluntary life, health and accident products as employees are looking to supplement their coverage and secure their future, especially to protect themselves and their families during uncertain economic times."

He notes that supplemental health products can cover a range of expenses, including inpatient and outpatient deductibles, emergency transportation and more.

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Tony Webb, a researcher at the Center for Retirement Research at Boston College in Chestnut Hill, Mass., says employers should do as much as possible to help employees manage their defined-contribution plans.

"A 401(k) plan can work well if used properly, but there is a lot of responsibility on employees and chances to make missteps," he says.

HR leaders should help employees make effective use of such plans by putting a strong emphasis on participation and providing tools to manage plans as effectively as possible.

"Offering these benefits as part of an employee-value proposition will increase the attractiveness of the employer as well," Webb says.

According to Eldholm, employees are beginning to understand that if they maintain their health -- by trying to reduce obesity, quit smoking, exercising and other healthy pursuits -- they have a self-managed answer to surviving healthcare costs.

"Taking better care of yourself is a start," he says, adding that employers should boost the use of incentive plans tied to wellness to further reduce healthcare costs. "The results won't be immediate, but they can make a difference. The data shows that wellness will have a positive impact on healthcare costs."

Luis Rodriguez, manager of human resources for The Ladders, a New York-based career site for professionals, says it's up to organizations to take the lead.

While younger workers (the average worker at The Ladders is 27 years old) may not be thinking about 40 years down the road, his company is very committed to a strong benefits communications plan and makes sure the workforce gets involved at an early age in retirement planning via the company's 401(k) plan.

"The onus is on employers to help people understand how they can maximize their benefit programs," says Rodriguez, adding that The Ladders offers some unique benefits, such as unlimited vacation time, to build employee engagement and satisfaction. 

"We spend a lot of money on employee benefits, and we want employees to take advantage of what we offer. That is one way to help employees such as those in the survey who are feeling insecure about rising costs and retirement."

Towers Watson's Wagner says the survey most reflects the need of employees for some predictability, and he recommends employers carefully parse out scarce benefit dollars in ways employees value the most.

"Everyone needs a certain amount of stability in life and right now instability is everywhere," he says. "This situation will not be resolved quickly, of course, but employees are asking for these types of assurances. Whether it happens or not, who knows? But employers need to think about innovative ways to help employees find even a little of that stability."

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