Benefits April 9, 2014

Employee Behaviors Top Health Care Cost Challenge

April 9, 2014 (PLANSPONSOR.com) – Improving the health of employees, as a way of improving health care costs, is becoming a greater priority for companies, says a new report.
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“The Willis Health and Productivity Survey Report 2014” from Willis North America, Inc. finds the top three challenges in controlling health care costs identified by survey participants include employees’ health habits (61%), high cost catastrophic cases (47%) and the cost of compliance due to health care reform (34%).

With employee health behaviors topping the list, the authors of the study believe this suggests a continued trend of health and wellness intervention. Organizations also appear to be more engaged in addressing high cost health claims, recognizing the cost challenges they face with catastrophic claims.

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In order to address the topic of employees’ health habits, the study finds, organizations are engaged in a growing number of health and wellness strategies. Providing employees with tools and information in order to become better consumers (64%) is the number one strategy organizations are using to address rising health care costs. Sixty percent (60%) of organizations are actively promoting health improvement programs and resources. For 2014, the majority of organizations (53%) are implementing a high deductible health plan in an effort to control rising health care costs. The increase in participants implementing high deductible plans demonstrates a shift by organizations to empower their employees to become more informed health care consumers.

The study also shows less than 10% of survey participants are currently implementing a plan to direct employees to a public or private exchange as a way to offset rising health care costs.

In terms of health improvement programs and resources, 68% of organizations surveyed for the report say they have some type of wellness program in place. This represents an increase of 9% compared to 2013. Of these 68%, 28% have a basic program, 29% have an intermediate program and 11% have a comprehensive program.

The report defines the types of wellness programs as follows:

  • Basic – Program offers a few voluntary activities, such as lunch and learns, health fairs and team challenges. They operate with minimal or no budget.
  • Intermediate – Program offers most components of a basic program but adds features such as health risk assessments, onsite biometric screenings, health coaching or a wellness web portal. Some incentives are available for program participation and a designated wellness budget.
  • Comprehensive – Program offers most components of an intermediate program, plus targeted behavior change interventions and has significant wellness incentives. Offered to spouses, tracks wellness program data year by year, and focuses on evaluating the impact of the wellness program.

Thirty-two percent of organizations surveyed for the report say they do not offer a wellness program. Ten percent of that 32% recognize the importance of programs and plan to implement a wellness program in the future.

Organizations surveyed for the report say the biggest barriers to offering a wellness program are a lack of time and staff to dedicate to it. Budget constraints are also a reason cited for not implementing a wellness program. The report also finds very small organizations believe they have too few employees to offer a wellness program. However, the authors of the report caution that an analysis should be conducted of staffing costs versus the high cost of employee poor health habits and claims.

More than 900 organizations were surveyed for the report between November 1 and November 22, 2013. Participating organizations ranged from fewer than 100 to more than 10,000 employees. Organizations were asked to participate in the survey whether they had a wellness program or not.

The full report can be downloaded here.

Benefits April 9, 2014

Companies Focus on Elective Deferred Compensation

April 9, 2014 (PLANSPONSOR.com) – When it comes to executive retirement arrangements, a recent study reveals a continued emphasis by U.S. companies on elective deferred compensation.
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Towers Watson finds that such arrangements allow executives to control the timing of the taxation of incentive payouts and are therefore seen as a critical component of the overall executive wealth accumulation opportunity.

The study of executive retirement benefit practices during 2013, “Executive Retirement Benefits: Recent Actions and Design Considerations,” examines the design and prevalence of non-qualified retirement plans in U.S. organizations. Topics covered include the types of plans offered, the level of benefits provided to a typical executive and the prevalence of key benefit provisions.

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Although the percentage of U.S. employers that sponsor non-qualified defined benefit retirement plans (NQDBs) continues to decline, reflecting the closing or freezing of many broad-based DB plans, most of the organizations queried for the study (71%) continue to provide some type of employer-paid arrangement. This includes NQDBs or non-qualified defined contribution plans (NQDCs). On average, these plans deliver an additional 5% to 7% of earnings in annual retirement income to the typical mid-level executive.

The study finds that for 2013, the majority of organizations (72%) also provided elective deferral arrangements (EDAs) without any employer matching contributions. While the percentage of organizations offering EDAs has declined slightly in recent years, these plans remain the most prevalent type of non-qualified retirement arrangement.

According to study, these plans are taking on added importance for many high-level workers and many organizations are putting more emphasis on communicating to their executives that the EDA is a significant part of their long-term capital accumulation opportunity. However, Towers Watson notes that proposed tax reforms submitted recently to Congress could decrease the tax advantages of non-qualified deferred compensation programs.

The study also finds that:

  • About half of the organizations that continue to sponsor employer-paid non-qualified plans (DB or DC) offer pure “restoration” benefits only (i.e., the minimum level of benefits necessary to restore those lost as a result of statutory limits on benefit levels or the amount of pay that can be taken into account in benefit formulas). True supplemental executive retirement plans (i.e., plans that provide benefits in excess of pure restoration) continue to be more prevalent among organizations that sponsor NQDB plans.
  • NQDB plans are more likely to include annual incentive compensation in determining benefits than are NQDC plans in calculating employer contributions.
  • While most non-qualified retirement plans cover broad groups of executives, 20% of the organizations studied provide supplemental individual retirement benefit arrangements for one or more of the named executive officers. These one-off arrangements are generally designed to compensate mid-career hires for any loss in benefit value due to their change in employment.
  • In terms of income replacement, the median level of retirement benefits (including from qualified and non-qualified plans and Social Security) provided for an average mid-level executive is 30% of total cash earnings at age 62 and 37% at age 65.
  • Although there’s no requirement to disclose whether and how nonqualified plans are funded, data from the study shows that 17% of organizations with NQDB plans and 23% of those with NQDC plans use some type of funding vehicle to secure their non-qualified retirement plan arrangements. The most commonly disclosed funding vehicle is a “rabbi” (or grantor) trust. Although the publicly disclosed data is limited, the study suggests that company interest in funding non-qualified liabilities continues to be high and that 50% or more of organizations that sponsor these plans set aside some assets to secure the benefits, often using company-owned life insurance or mutual funds.

The study also reveals that the ongoing shift toward DC approaches for broad-based populations has not translated into a corresponding shift in employer contributions toward non-qualified arrangements for executives. This is evidenced by a net decline in non-qualified employer-paid plan sponsorship, according to Towers Watson. Employers may be using other reward elements (e.g., enhanced long-term incentives) and expanded elective deferral opportunities to compensate for the reduction in traditional employer-paid non-qualified retirement benefits, although the study notes there is no specific data on the extent to which such replacement is taking place.

The study focused on the executive retirement practices in 352 organizations and compares the current state (through mid-year 2013) with research findings from 2009 and 2011, based on company proxy disclosures.

More information about the study, including where to download it, can be found here.

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