Benefits November 17, 2021

Workforce Evolution Intensifies Need for Quality Benefits

Research shows employees across all generations view insurance benefits offered at work as more valuable today than before the COVID-19 pandemic.

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With the demand for talent increasingly outstripping supply, and a third of U.S. workers considering a job change in the next year, employees are paying more attention than ever to their financial security and their emotional and physical well-being in the workplace. In fact, surveys show shifting demographics, a diversifying workforce and new employee expectations are redefining the workplace benefits market beyond traditional health care insurance products.

In response, employers, too, are placing significantly more value on their nonmedical benefits programs as they look to address emerging and unmet needs. A new study conducted by LIMRA and Ernst & Young (EY) surveyed employers and workers, and interviewed brokers, benefits administrators and technology providers, to explore the different perspectives on the current and future state of the U.S. workforce benefits market.

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According to LIMRA and EY, there are now four generations firmly entrenched in the workplace: Baby Boomers, Generation Xers, Millennials and Generation Zers. At the same time, there are more contingent (i.e., freelance or gig) workers and increased racial and ethnic diversity among the labor force. Another evolving trend is the increased use of remote work. All in all, the U.S. workforce is more heterogeneous than ever before. With this comes a greater variety of benefit needs and preferences that evolve over time, LIMRA and EY say.

A significant number of employees across all generations view insurance benefits offered at work as more valuable today than before the COVID-19 pandemic. Millennials lead on this front, with 47% saying they are now more likely to look for employers that genuinely care about their well-being. The same is true of 33% of Gen X workers, 29% of Gen Z workers and 24% of Baby Boomers. All the generations agree that generous and responsive benefits are among the best ways employers can demonstrate such care.  

The LIMRA and EY survey data shows a majority of midsize (defined as having 100 to 999 employees) (66%) and large (1,000 or more employees) (69%) employers are prepared to offer more benefits in the next five years as they compete for talent, while 45% of small companies (fewer than 100 employees) indicate the same. Almost none say they will be offering fewer benefits.

“Our study finds three-quarters of employers (76%) believe their employees will expect a wider variety of benefits options in the future,” says Patrick Leary, corporate vice president and head of LIMRA workplace benefits. “Employers see benefits as a necessary tool to be able to compete in the war for talent. Despite 54% of employers reporting a decrease in revenue in the past year, the vast majority are not planning to cut back on benefits and almost half are considering offering a customized menu of benefits to help attract and retain talent.”

While benefits are important, many employees do not fully understand them, a challenge that will only become more difficult as benefit options expand and become more complex. Only a small number of employees don’t understand benefits such as medical/health insurance (2%), dental (3%), life insurance (4%) and retirement (5%), but the number increases when they were asked about disability insurance (13%), accident insurance (14%), critical illness insurance (18%) and hospital indemnity insurance (18%).

Employees say they are looking for clearer information and recommendations about the benefits best suited for them, and they cited multiple challenges to understanding what’s offered. The survey found the most common challenge was having insufficient time to make informed decision at 32%, and after that, 28% cite the complexity of benefits. Twenty-seven percent say ineffective communications prevented them from better understanding benefits.

Employers recognize the need to improve and enhance digital applications and services that support benefit implementation, education and enrollment. Up to 80% of employers across all business size segments believe technology will play a larger role in benefit carrier selection in five years, as they feel technology makes processes more efficient.

There are a significant number of digital services that employers don’t have but want, which LIMRA and EY say signals unmet needs and opportunities for digital support by providers. The most commonly cited of these services are same-day claim payments, at 46%; self-service and real-time quoting, at 34%; employee and employer mobile app access, at 29%; and decision support tools for employees, at 28%. Only 56% of employers said they were very satisfied with the technology provided with their insurance and benefits carriers today, and 57% believe they will be more reliant on insurance carrier technology in five years.

“Not surprisingly, COVID-19 has accelerated the transformation in workplace benefits. Not only did it heighten workers’ awareness of the value of life insurance, disability, leave and income protection products, [but] it also revealed a significant need for streamlined digital access to information and services that employees can access from wherever they work,” says Chris Morbelli, EY Americas life and group insurance transformation leader. “Ultimately, rich, personalized benefits that support increased work-life balance and meet the needs of a diverse, multigenerational workforce will be critical to attracting and retaining top talent in the future.”

The full research report can be viewed here.

Opinions November 17, 2021

ESG: Popular, But Not Simple

Finding appropriate benchmarks for ESG investments in retirement plans will require careful consideration.

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After a summer of extreme fires, floods and droughts, environmental, social and governance (ESG) investing prompts great excitement both among investors and the investment industry. Many are motivated by the idea that their savings can be put toward solving some of society’s greatest challenges. 

In spite of significant interest (particularly among younger investors), retirement plan fiduciaries have hesitated to adopt explicitly ESG factors because of a lack of clarity as to whether these factors are appropriate for Employee Retirement Income Security Act (ERISA)-qualified retirement plans. Recently, however, the Department of Labor (DOL) issued a proposed rule that would amend its investment duties regulation related to the use of ESG factors in selecting investments appropriate for ERISA-qualified plans.  The new rule would explicitly give a green light to ESG factors. Given this new regulatory support, undoubtedly a whole new category of ESG funds and strategies will emerge in the universe of investment options.

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Notwithstanding this widespread demand and excitement, we want to urge caution to those who are fiduciaries of qualified retirement plans. Any fiduciary that is considering adopting an investment strategy that includes ESG factors should first consult its own fiduciary policies and procedures. Very often, implementing new strategies or adding new fund options requires committee approvals and may require amending other documents, such as an investment policy statement (IPS).

Once procedural requirements are addressed, a fiduciary will need to establish a prudent analytic framework for evaluating ESG managers and strategies. We are far along in our work of creating a process-driven analytic model, and, as we dig into the research, the complexities are multiplying. ESG is a very broad label and managers employ different ESG data sources, factors and techniques in deciding what can qualify as an ESG fund or strategy. Analyzing funds and strategies is not necessarily an apples-to-apples comparison. Best practices, however, suggest that fiduciaries adopt an analytic framework before jumping in and examining specific managers or funds. 

Another issue that jumps out at us as the conversation on ESG investing in retirement plans heats up concerns the benchmarking of ESG portfolios. Benchmarking is an important tool used by fiduciaries to assess the investment performance of an investment manager. How do you analyze an individual manager’s investment performance, or compare the performance of managers against their peers, unless it is compared against a benchmark? 

As mentioned above, within the broad headings of environmental, social and governance, managers employ numerous factors and multiple methodologies in applying these factors. In the context of ESG portfolios, the plan fiduciary’s selection of a benchmark is critically important.

In fact, selecting a benchmark might prove to be more valuable than endorsing any specific ESG factors or data sources. We suggest this hypothesis upon examination of other investment strategies. For example, when fiduciaries review active growth managers, they likely identify the growth factors employed by the manager, and they no doubt validate the investment processes identified by the manager. However, in the end, performance will be evaluated against a benchmark. Performance versus a benchmark remains a key evaluation tool. We predict that the chances are high that, over time, the same dynamic will likely prevail related to ESG strategies.

So, where does the current industry stand with respect to ESG benchmarks? Our initial research reflects that there is an increasing number of ESG benchmarks reflecting various characteristics; some are broad, some are narrow. We welcome this wide array of benchmarks and the analysis and commentary which will naturally evolve. Ultimately, the academic and industry debate on benchmarks will benefit plan participants. At the moment, however, our review and research has not revealed that one benchmark has risen to the level of an industry standard.

When considering whether a published benchmark is appropriate, here are a few questions to ask:

1)    What is the source of the ESG data used to rate the benchmark constituents? What is the criteria for choosing that source?

2)    What ESG factors are used in compiling the benchmark? What is the construction methodology for the benchmark?

  1. What are the rules for including the benchmark constituents?
  2. How are individual companies weighted?

3)    Is the benchmark recognized as a broad and investable index? 

Importantly, selection of a benchmark is not a static event. For those who may remember the early days of international investing, the MSCI EAFE [Europe, Australasia, and the Far East] Index quickly became an industry standard. However, over time, the debate shifted to cap-weighted indexes, equal-weighted indexes and indexes reflecting many different industry tilts. Benchmark selection remains an active topic of review. 

These questions do not yet have answers, but like all the other challenges we’ve seen over the years, they’re coming. We continue to engage with credible sources throughout the industry and urge plan fiduciaries who may be considering adopting ESG strategies to do the same. 

We love the robust dialogue that new options like these ignite. These are exciting times and the excitement in the marketplace is building. Our fiduciary DNA, however, urges prudent decisionmaking.

 

Mitch Shames, Esq., is the CEO of Harrison Fiduciary Group, a registered investment adviser (RIA).

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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