Employers’ cost to provide employee benefits has risen 24 percent since 2001

Employers’ cost to provide employee benefits, measured as a percentage of pay, increased 24 percent between 2001 and 2015, due mainly to a doubling in health care benefit costs, according to recent research from Willis Towers Watson. The study, Shifts in Benefit Allocations Among U.S. Employers, found a major shift in how employers allocate benefit dollars and prompts questions as to whether they are delivering the benefits their employees want.

According to Willis Towers Watson, the total cost of employer-provided benefits-health care, retirement and postretirement medical-rose from 14.8 percent of pay in 2001 to 18.3 percent of pay in 2015, an increase of 24 percent. During this period, health care costs for active employees more than doubled, rising from 5.7 percent to 11.5 percent of pay. Conversely, total retirement benefits, which include defined benefit (DB), defined contribution (DC) and postretirement medical plans (PRM), declined by 25 percent between 2001 and 2015, from 9.1 percent to 6.8 percent of pay. The study defined total retirement benefits as the combined value of DB, DC, and PRM plans. Other benefits such as paid time off, lifestyle, and flexible benefits were not included in the analysis.

“The rising cost of employee benefits remains a challenge as employers seek to get the most employee value from their pay and benefit programs,” said John Bremen, managing director of human capital and benefits at Willis Towers Watson. “Beyond the overall increase, there has been a seismic shift that can be characterized as a tale of two benefit programs. Health care benefits are eating up a larger portion of dollars while the amount spent on retirement programs is on the decline. This reallocation has major implications for employers and employees alike.”

In 2001, health care costs for active employees comprised about two-fifths (42 percent) of benefits, while retirement benefits made up the remaining three-fifths (58 percent). By 2015, the ratio had flipped, with health care benefits accounting for just under two-thirds of costs (64 percent) and the retirement share falling to slightly more than one-third (37 percent).

The study noted much of the reduction in retirement costs during this 15-year period can be attributed to the widespread shift by employers from offering a traditional DB plan as their primary retirement vehicle, to typically replacing them with enhancements to their DC plan. While DC plan costs increased by 1.6 percentage points between 2001 and 2015, this wasn’t enough to offset the 2.9 percentage point decline in DB benefit costs.

The analysis also suggests the reallocation of retirement dollars to health care benefits might not align with employee preferences and needs. While Willis Towers Watson found that employees value their health care benefits just as highly as their retirement benefits, many employees appear to have reached the limit of how much they are willing or able to pay for health care benefits. Additionally, many employees are worried about their current and future financial situations, and fear they won’t have saved enough for retirement and will have to work past normal retirement age.

“With the shift from DB to DC plans well established, employers may want to reevaluate the allocation of benefit dollars to better respond to employees’ needs and concerns,” said Alexa Nerdrum, senior retirement consultant at Willis Towers Watson. “This could consist of more tax-efficient saving mechanisms, such as the broader use of health savings accounts, as well as wiser spending on health care. While the solution for each organization will be unique, employers need to balance cost with the long-term returns on providing benefit packages that will be highly valued by their workers.”

SOURCE: www.willistowerswatson.com
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