Confessions of an employee benefits professional, great myths in employee benefits

Quick, give me a new buzz word for how important employees are to this organization

Providing employee benefits to workers is a complex and very expensive undertaking made more so by more complex laws and regulations that have grown tremendously since 1974.  Employee benefits are long-term commitments and liabilities.  Workers come to rely on them heavily for a substantial portion of their families security now and in the future.  While you can argue whether or not all this security should be tied to the employer, as long as it is and as long as employee benefits are part of the employment and compensation deal those commitment should be honored.  Employer should not make “promises” they cannot or do not intend to keep.  Employers should not provide plans they cannot continue to fund in good times or bad. 

Over the years I often heard things like “our employees are our most important asset,” or “we cannot succeed without you,” or “we need our employees engaged,” or any number of similar expressions of commitment to the workforce.  Well, if all that is true (and it really is), why do the security packages for this important asset to any organization become the first targets of cost cutters?   Hey, if you don’t want to provide employee benefits to workers fine, don’t.  If you need to cut a new deal, make trade offs. Better still, put a new deal in for new workers so they know upfront what to expect and count on, but don’t pull the rug out from under people who earned what they have today.

  1. Employee benefits are part of your compensation; if there were no benefits, your pay would be higher. 
    • Really, ask the retiree who worked thirty years for his pension and health benefits and then saw the benefits cut or eliminated after he retired. Hey Mr.CEO, we were only kidding about that bonus you got four years ago, we want it back.
  2. We are giving you a healthy living credit if you participate in our wellness programs.
    • Did I forget to mention that we already built that credit into the premiums you pay so if you participate in the wellness program you are really just breaking even?
  3. We are converting to a cash balance pension plan because it will give you greater flexibility, it is easier to understand, you can see your account grow each year and we know you will appreciate it more
    • I may be able to see my account grow, but keep it invisible and at the same level it was before. I understand the old plan as much as I need too – I get a monthly income for life and I do appreciate it.
  4. We are converting to a high deductible, consumer driven health plan with an HSA so you can become a better health care consumer.
    • Here are a few bucks toward the possible $4,000 out-of-pocket costs your family will have before our new plan pays a dime. Alternatively, you can put your own money in the plan and use it today or tomorrow or when you retire. It’s all really quite simple, we are saving a bundle cutting your benefits
  5. Effective next January we are dropping health plan A, getting a new carrier for Plan B and eliminating the plan where you can go to any doctor you like. 
    • I have no idea what I am doing, but a consultant convinced me all these changes would save the company money…at least this year.  Sorry for disrupting health care for you and your family, your wife will understand.

One comment

  1. I’ve been working in employee benefits for much less time than you, only 31 years so far. I too have confessions …

    (1) I could never get with the program. Time after time I confirmed to the HR folks that benefits don’t “… attract, retain and engage top talent”. They were shocked, shocked at the heresy when I noted that benefits don’t differentiate talent, top or otherwise. Where benefits attract, they may often attract anti-selection. Where benefits retain, they may retain folks who prefer to leave but either can’t find comparable employment or must stay to maximize their benefits. Benefits exist for two purposes only – tax preferences and group dynamics (group administration, risk spreading, etc.) Where neither exist, benefits should not exist. There should be a preference for cash and worker control over their rewards.

    I confess here to making the mistake of allowing various plans and options to continue without change – even though they did not garner tax preferences nor group efficiencies … often we simply avoided change to avoid conflict.

    (2) Pension and retiree medical promises without funding are mere dreams. At least we don’t have an 8+% assumed return on investments, like today’s CALPERS folks. How about the rest of you out there – did you use that 8% – 10% assumed return to avoid paying the variable PBGC premium – then, later, did you terminated your defined benefit pension to avoid the increased funding requirements under PPA’06? Did you complete the effort and stick PBGC with an underfunded plan? See the $6B liability bomb dumped on PBGC by the formerly EMPLOYEE-OWNED United Airlines pensions (where they paid less than $100MM in PBGC premium over the 30 or so years after ERISA – some return, eh!):

    So, at United, the underfunded pension plan was short almost $10B, and of that amount $3B was not insured by PBGC… so, it got cut. Can United’s workers really tell us that, as owners of the company, along with their union leaders, they negotiated these pension benefits and didn’t understand the need for funding? They want you to believe that … here’s the movie…

    Mistake I made … well, reasonable assumptions coupled with large contributions… opened us up to criticism and ridicule about how conservative we were.

    (3) When you suggest that benefits are not truly part of an individual’s compensation, I guess you mean that a prospective benefit reduction is different from, say, a prospective reduction in salary. News to me… and probably to most employers who deliberately include a reservation of rights clause, and maybe an employment at will policy.

    Same with respect to active and retiree medical … are you suggesting that once offered, welfare benefits should vest and no prospective change should be permitted? Didn’t think so.

    Keep in mind that nothing stops the employer from making such commitments… they can just put it in writing and administer the plans in that fashion. But, obviously, that isn’t what most employers intend, those whose plan documents and SPD’s have reservation of rights provisions must have had something else in mind. What effrontery I had in making sure that the disclosures in my plans actually matched my company’s intentions!.

    (4) You can find such commitments in Europe and, if you are a public employee, in Illinois. Say, your employer offers a pension in Germany. They can’t later reduce the rate of accruals on future service without a showing of “objective justification”, and no “wear-away” type changes are permitted to apply to existing workers unless you can show an “urgent or important reason” – one that must pass muster at the worker council.

    However, even that limitation isn’t good enough for public employees in Illinois. There, the state’s duty to maintain retirement benefit accruals for its public employees is directly mandated in the Illinois Constitution. Yes, a constitutional mandate!!! Many believe Illinois cannot pass a new constitutional amendment to reduce future accruals – that such a change would not survive a legal challenge. Certainly, the absolute nature means any changes can only apply to future hires, and savings won’t occur for decades into the future – not until new hires become the vast majority of workers. Some deal for taxpayers, eh?!

    Are you recommending the same for private employers? Well, we will see how Illinois employers respond to the higher taxes needed to fund public pensions and retiree medical … now that Governor Quinn/Illinois D’s decided to raise taxes before losing control. I hear the new governor of Wisconsin is already trying to lure employers to his state.

    (5) With respect to wellness programs, I agree that many did reallocate money from acute care coverage to use for wellness programs. Why isn’t that a good idea given that most employer’s have already concluded that they cannot indefinitely afford/sustain the health coverage they currently offer? Wellness programs intend to change health behavior, to reduce risks, and to encourage wellness. I don’t accept any of the return on investment guesstimates you read about today, 3 for 1, etc. However, even if all the worker gets is $1 in wellness benefits for her $1 reduction in acute coverage, how is that a take-away? If her health improves, if her behavior changes, if her medical risk is reduced … doesn’t she directly benefit the most? You would prefer we continue the status quo?

    (6) Prior to the Pension Protection Act of 2006, the D’s and their fans thought the debate was over final average pay defined benefit pension plans and cash balance pension plans. Nope. The debate had long since changed to one between converting to a cash balance formula or freeze/terminate the DB plan. We’re down to < 50% of the Fortune 100 with a traditional final average pay DB plan open to new hires. The same D's and their fans had a similar position on retiree medical – remember AARP vs. EEOC? So, when Congress enacts legislation, like PPA 2006, followed by some overreaching regulations, who is penalized… no, not the company that freezes/terminates their underfunded DB plan. No, the law and regs target the companies that remain, the ones who attempt to sustain a cash balance formula DB plan open to new hires.

    (7) Certainly benefits are a part of total rewards, or total compensation. You want the CEO to return her bonus paid in years past? Watch out what you ask for… if they can achieve that result, they may not stop with the CEO's bonus … next, they may propose recovery of the CEO's pension from underfunded plans. Next, they may look out way …. concluding the benefit professionals were or should have been fiduciaries and responsible for failing to fully fund benefits.

    (8) How is it you don't mention Congress at all – those folks who limited the tax preferences and discouraged employers from fully funding their pension and retiree medical benefits? Have you forgotten the Tax Reform Act of 1986, or DEFRA/IRC 419 limits on funding retiree medical? How about reversion taxes which many believe contributed to the general underfunding of pension plans?

    Or, with respect to those network changes for retiree medical coverage where Medicare Eligible – as you mention in your last item – why no mention of Congress at all? How about the millions of Medicare beneficiaries who had access to an open private fee for service (PFFS) Medicare Advantage option? Gone. Did you pick up the phone and give your rep in Congress a call when they targeted those options for elimination as overly generous to retirees? At my former employer, the PFFS was eliminated 1/1/11 to comply with legislative changes. I called and wrote my rep and senators – no one was listening – then or now.

    (9) I did make major mistakes in medical coverage. We provided access to $5 and $10 copay HMOs in the 1990's – riding the low inflation bandwagon. We should have been making annual changes in either point of purchase (copays, deductibles, coinsurance) or point of enrollment (contributions) cost sharing … or both … because we knew it was only a matter of time before inflation restarted. Congress undermined HMO's with threats of a patient's bill of rights … shifting us to PPO options, which had broad networks and minimal fee preferences (mile wide and an inch deep). Too many of my workers got comfortable with the minimal change during that five – seven year period, too many thought that was the new normal … oops

    (10) Finally, HDHP/HSA. All I can say is that I wish such options were available to me when I was in my 20’s, so I could have build up an account balance for my later years. I knew about the need to save for future medical expenses when I was younger and in good health, but didn't do anything about it. I actually created a workable savings account concept in 1992, based on Revenue Ruling 61-146, Revenue Ruling 67-315, etc … but failed to garner support to implement that option. Similarly, I was one who knew you could not link a 401(h) account to a 401(k) plan way back in 1992 when we added a 401(h) to our defined benefit pension plan. It was obvious we needed to prompt workers to save more … for both income replacement and post-employment medical, but I didn't do much more than encourage workers to save more for the next 15 years…

    So, yes, I made mistakes. But, I can confirm that it is very lonely when you try to do the right thing, fund the plan, manage benefit expectations, etc. … limit offers to what can be readily sustained … you win criticism from all quarters – workers, HR, unions, business leaders and legislators.

    Like you, when I added retiree medical costs to our pre-retirement seminar in 1988, many shook their heads – not only at the cost to the retiree, but also the cost to the company. And, yes, we now have a defined contribution retiree medical program designed to encourage people to save for post-employment medical … where all, including new hires, can qualify for company-paid support.

    So, don't cry for me… I made mistakes, but I've also done my best.


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