Tailoring voluntary benefits to meet employees' generational needs
Originally posted November 21, 2014 by Elizabeth Halkos on www.ebn.benefitnews.com
Well-designed benefits plans should be based on the desires and needs of employees in addition to supporting the employer’s business objective of providing a benefits package that aids in recruiting and retaining its workforce.
Once considered just a nice extra for a more comprehensive benefits package, voluntary benefits are now an essential element of the employee benefits program because they allow workers to customize their benefits and assist with the employee’s overall financial wellness.
There’s no doubt financial wellness is a concern for most of today’s employees. In a July 2014 Harris Poll on behalf of Purchasing Power, 80 percent of employees working full-time said they have financial stress today. Their stress is related to both long-term and short-term financial needs. Specifically, 67 percent indicated the stress is related to long-term financial needs (savings, retirement plan, etc.), while 60 percent said it was short-term related (everyday living expenses as well as unexpected financial needs such as a car repair, appliance replacement, or emergency medical expenses).
With such varying concerns among employees, employers need to know what voluntary products will most benefit their workers’ demographics. Today’s workforce spans three generations from millennials to baby boomers that look at work, life, money and finances in totally different ways. Likewise, they have different benefit needs and with voluntary benefits, workers can choose what suits their particular situations.
Traditional voluntary benefits are mostly self-explanatory. Let’s consider the growing list of non-traditional voluntary benefits in the marketplace today which give a wide scope of opportunity for meeting employees’ needs. Based on focus groups with employees from all generations, here are the non-traditional voluntary benefits that help address their financial situations.
Baby boomers (born 1946 – 1964)
Baby boomers are worried. For the most part, if there’s something baby boomers want, they are able to buy it. However, many will question if they should buy it or rather save that money. Instead, they are trying to be financially responsible and scaling back from a materialistic lifestyle. Baby boomers, even if they are high earners, worry about retirement – both having enough money for retirement and wondering when the right time is to retire.
Non-traditional voluntary benefits that would appeal to baby boomers include:
- Discount Programs
- Financial Counseling
- Legal Assistance
- Group Auto Insurance
- Home Warranty Insurance
- Wellness Programs
- Long-Term Care Insurance
Generation X (born 1965 – 1979)
Generation X is stretched thin. Gen Xers’ work ethic is balanced and flexible with a “work hard, play hard” attitude. This generation’s financial stressors come from multiple angles. They are raising children, preparing for care of their aging parents and trying to save for their own financial futures. They appear to be having the toughest time financially. They find it difficult to meet their household expenses on time each month and are the most likely to carry balances on their credit cards.
Non-traditional voluntary benefits that would appeal to Gen Xers include:
- Discount Programs
- Employee Purchase Programs
- FSAs
- Financial Counseling
- Wellness Programs
- EAP
- Child Care
- Cyber Security Insurance
- Homeowners’ Insurance
- ID Theft Protection
- Long-Term Care Insurance
Millennials (born 1980 – 2000)
Millennials are confused. They often juggle many jobs and move from job to job frequently. Their greatest fear is silence, unplugging, routine and eternal internship. Keys to job retention for millennials are personal relationships, multiple tasks and fast rewards. Their benefits needs include portable benefits, forced savings, financial education and concierge services. Key values for millennials include future financial security and better quality of life. To improve their financial situation, they need a better job or a promotion and expert advice on how to make the most of their money in addition to beginning a 401(k) or other retirement plan. The average millennial has $29,000 in student loan debt alone. Not surprisingly, they are also more worried about getting rid of or incurring additional debt than their day-to-day expenses.
Non-traditional benefits that would appeal to millennials include:
- Employee Purchase Programs
- Discount Programs
- Tuition Assistance
- Employee Assistance Program
- Wellness Program
- FSA
- Financial Counseling
- ID Theft Protection
By recognizing the value in voluntary benefits and adding to their voluntary offerings, employers not only can provide for their employees’ financial wellness, but can retain a loyal, motivated workforce as well.
The Retirement Readiness Challenge: Five Ways Employers Can Improve Their 401(k)s
Originally posted October 20, 2014 on www.ifebp.org.
Today, nonprofit Transamerica Center for Retirement Studies® ("TCRS") released anew study and infographic identifying five ways employers can improve their 401(k)s. As part of TCRS' 15th Annual Transamerica Retirement Survey, this study explores employers' views on the economy, their companies, and retirement benefits. It compares and contrasts employers' views with workers' perspectives.
"As the economy continues its prolonged recovery from the recession, our survey found upbeat news that many employers are hiring additional employees. Moreover, they recognize the value of offering retirement benefits," said Catherine Collinson, president of TCRS.
Seventy-two percent of employers have hired additional employees in the last 12 months (compared to only 16 percent that say they have implemented layoffs or downsizing). Among employers that offer a 401(k) or similar plan (e.g., SEP, SIMPLE), the vast majority (89 percent) believe their plans are important for their ability to attract and retain talent.
Retirement Benefits and Savings Are Increasing (Yet More Can Be Done)
Employers are increasingly offering 401(k) or similar plans to their employees. Between 2007 and 2014, the survey found that the percentage of employers offering a 401(k) or similar plan increased from 72 percent to 79 percent. The offering of a plan is highest among large companies of 500 or more employees (98 percent) and small non-micro companies of 100 to 499 employees (95 percent) and lowest among micro companies of 10 to 99 employees (73 percent).
During the recession and its aftereffects, many 401(k) plan sponsors suspended or eliminated their matching contributions. Plan sponsors that offer matching contributions dropped from 80 percent in 2007 to approximately 70 percent from 2009 to 2012. In 2014, the survey found that 77 percent of plan sponsors now offer a match, nearly rebounding to the 2007 level.
"Despite the tumultuous economy in recent years, 401(k) plan participants stayed on course with their savings," said Collinson. According to the worker survey, participation rates among workers who are offered a plan have increased from 77 percent in 2007 to 80 percent in 2014. Among plan participants, annual salary contribution rates have increased from seven percent (median) in 2007 to eight percent (median) in 2014, with a slight dip to six percent during the economic downturn.
Workers' total household retirement savings increased between 2007 and 2014. The 2014 estimated median household retirement savings is $63,000, a significant increase from 2007, when the estimated median was just $47,000. Notably, Baby Boomers have saved $127,000 (estimated median) in household retirement accounts compared to $75,000 in 2007. "For some workers, current levels of retirement savings may be adequate; for many others, they are not enough," said Collinson.
Five Ways Employers Can Improve Their 401(k)s
"401(k)s play a vital role in helping workers save and invest for retirement," said Collinson. "Until every American worker is on track to achieve a financially secure retirement, there will be opportunities for further innovation and refinements to our retirement system."
The survey identified five ways in which employers, with assistance from their retirement plan advisors and providers, can improve their 401(k)s. Plan sponsors are encouraged to consider these enhancements to their plans:
1. Adopt automatic plan features to increase savings rates
"Automatic enrollment is a feature that eliminates the decision-making and action steps normally required of employees to enroll and start contributing to a 401(k) or similar plan," said Collinson. "It simply automatically enrolls employees. They need only take action if they choose to opt out and not contribute to the plan."
The percentage of plan sponsors offering automatic enrollment increased from 23 percent in 2007 to 29 percent in 2014. Plan sponsors' adoption of automatic enrollment is most prevalent at large companies. Fifty-five percent of large companies offer automatic enrollment, compared to just 27 percent of small non-micro companies and 21 percent of micro companies.
Plan sponsors automatically enroll participants at a default contribution rate of just three percent (median) of an employee's annual pay. "Defaulting plan participants into a 401(k) plan at three percent of annual pay can be very misleading because it implies that it is adequate to fund an individual's or family's retirement when in most cases, it is not," said Collinson. "Plan sponsors should consider defaulting participants at a rate of six percent or more of an employee's annual pay."
"Automatic increases can help drive up savings rates: Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by one percent of their salary either annually or when they receive a raise, until such a time when they choose to discontinue the increases," said Collinson.
2. Incorporate professionally managed services and asset allocation suites
Professionally managed services such as managed accounts, and asset allocation suites, including target date and target risk funds, have become staple investment options offered by plan sponsors to their employees. These options enable plan participants to invest in professionally managed services or funds that are essentially tailored to his/her goals, years to retirement, and/or risk tolerance profile.
Eighty-four percent of plan sponsors now offer some form of managed account service and/or asset allocation suite, including:
56 percent offer target date funds that are designed to change allocation percentages for participants as they approach their target retirement year; 54 percent offer target risk funds that are designed to address participants' specific risk tolerance profiles; and, 64 percent offer an account (or service) that is managed by a professional investment advisor who makes investment or allocation decisions on participants' behalf.
"For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution. However, it is important to emphasize that plan sponsors' inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks, and fees to their plan participants," said Collinson.
3. Add the Roth 401(k) option to facilitate after-tax contributions
"Roth 401(k) can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age," said Collinson. The Roth option enables participants to contribute to their 401(k) or similar plan on an after-tax basis with tax-free withdrawals at retirement age. It complements the long-standing ability for participants to contribute to the plan on a tax-deferred basis. Plan sponsors' offering of the Roth 401(k) feature has increased from 19 percent in 2007 to 52 percent in 2014.
4. Extend eligibility to part-time workers to help expand retirement plan coverage
"Expanding coverage so that all workers have the opportunity to save for retirement in the workplace continues to be a topic of public policy dialogue. A tremendous opportunity for increasing coverage is part-time workers," said Collinson. Only 49 percent of 401(k) or similar plan sponsors say they extend eligibility to part-time workers to save in their plans.
"Employers should consider consulting with their retirement plan advisors and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement," said Collinson.
5. Address any disconnects between employers and workers regarding benefits and preparations
The survey findings revealed some major disconnects between employers and workers regarding retirement benefits and preparations. For example: Ninety-five percent of employers that offer a 401(k) or similar plan agree that their employees are satisfied with the retirement plan that their company offers; yet, in stark contrast, only 80 percent of workers who are offered such a plan agree that they are satisfied with their employers' plans.
"Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness," said Collinson. Just 23 percent of employers have surveyed their employees on retirement benefits and even fewer workers (11 percent) have spoken with their supervisor or HR department on the topic in the past year.
What are the 4 types of private exchanges?
Private exchanges are an ever-popular option for employers to provide health insurance to both their active and retiree populations. Estimates put the number of private exchanges at around 150, but according to PricewaterHouseCoopers Health Research Institute, they can be broken into four types. Barbara Gniewek, principal and private exchange lead with PwC in New York City, explains these are grouped based on their genesis, or their beginnings.
- Technology: This includes such companies as bSwift and Benefitfocus; many developed public exchanges in states that built their own, PwC says. Others are known for providing benefits administration as either an outsourced solution or enrollment for insurers. “They are like the vending machines [of private exchanges]; they provide infrastructure and you decide what products you want and what brands to have,” Gniewek says. “They are highly flexible.”
- Pure Play: These are very new technology infused and highly flexible systems that include such companies as Liazon. They are like a pre-stocked vending machine as they come with products on the shelves, including medical plans with certain carriers, Gniewek adds.
- Broker/Consultant: Calling these “really interesting,” Gniewek says they are built on technology platforms. They include such companies as Aon Hewitt and Arthur J. Gallagher & Co. Some of these are built in-house by the broker or consultant, but in many cases, are the result of partnering with a technology company
- Insurer: Including such companies as Cigna and Aetna, their strategy was to build their own private exchange to protect market share and separate themselves from the competition. The insurers, Gniewek adds, may also have relationships with networks and have clients they want to protect. Many of these also use technology developed by others.
So how does an employer pick which model to choose? Employers often rely on their advisers, including brokers and consultants – many of whom have their own exchanges. Gniewek says when PwC helps a client they do two main things as an evaluation:
First, an understanding what the employer is looking for, including making their own plan design or enhancing a strategy they already have. “Depending on what they are looking for, exchanges that meet their needs can differ greatly,” she says.
PwC also helps employers understand the different models and which plays to their employee size. “Which ones can best meet [employer’s] needs?” she asks. “That is what the consultant needs to do.”
Protecting the next generation of workers with voluntary benefits
Originally posted May 1, 2014 by Andrea Davis on https://ebn.benefitnews.com
As the Affordable Care Act continues to make its presence felt, and as employers look for new ways to control their health care costs and shift more of the responsibility for benefit decision-making on to employees, the role of voluntary benefits is changing. Once viewed as a nice-to-have benefit, some say voluntary benefits should now be advertised and heavily promoted to employees as an important component in their overall portfolio of benefits.
“It’s part of a trend sweeping the industry,” says Chris Hill, CEO of Spotlite, an online enrollment technology company. “This level of [benefits] engagement has never really been required before.”
Rewind a few years to benefit plans with low deductibles and rich benefits and “these supplemental products [were] less relevant,” he says. “Now you’re asking employees to meet a $2,500 or $5,000 deductible and they have to understand how the [health savings account] or [flexible spending account] works with that and why an accident plan, for example, may be complementary to the high deductible plan.”
Millennials in particular can benefit from education about voluntary benefits. While they may view themselves as invincible, they actually have a lot to protect. “They’re not really thinking about all those what-ifs, but probably more than any other generation, they have something to protect,” says Alison Daily, second vice president of clinical and vocational services at The Standard. “They’re very highly educated. A third of them have four-year college degrees, but that comes with a big price tag for them. The average millennial has $29,000 in student loan debt alone.”
And yet millennials are either unaware of voluntary benefits or reluctant to purchase them. Sixty-nine percent of employees age 25-29 don’t own any voluntary benefits, while 71% of those under age 25 don’t own any voluntary products, according to statistics from Eastbridge Consulting Group. Among older age groups, 60% of 45-49-year-olds own some type of voluntary product.
Still, there’s evidence that millenials value voluntary benefits and that the availability of these products may increase employees’ loyalty to the company. According to MetLife’s 12th Annual U.S. Employee Benefit Trends Study, 86% of Generation Y value having benefits personalized to meet their individual circumstances and age.
The challenges of engaging this tech-savvy group are well-known. Millennials have high expectations when it comes to technology and the overall online purchasing process. This is a group that “sends thousands of text messages on a monthly basis,” says Hill. “You’ve got to compete for their limited attention span so those communications need to be highly relevant.”
But for all the talk about how different Millennials are from other generations, Daily believes good communication resonates with everyone, regardless of age. “I think that maybe one of the mistakes people make, or confusion they have, is that the millennials are very different from their non-millennial peers,” she says. “They’re probably not as different as we think.”
Awareness vs. purchase
Still, there are tactics employers can use to better engage millennials in their voluntary benefits, starting with separating the process in their own minds between initial education and purchase.
“You have the initial communication about benefits – what the benefits are, here’s why you should care,” says Hill. Employers should strive for “concise messaging that drives an action and the action you want to drive upfront is getting the employee to learn about what’s offered to them,” he says.
He encourages employers to actively look at email open rates to get a better understanding of subject lines that resonate with millennials. “Relevant information, relevant subject lines, relevant email layouts, relevant electronic communications are going to drive that action,” he says.
Once employers are past that initial awareness phase and on to open enrollment, “you’re adhering to those same principles – how are we going to capture the attention of the user?” says Hill. “Here we actually want to drive decision making about the products.”
It’s that second sale – the actual purchase of voluntary benefits – that gets tricky with millennials, believes Hill, because they tend to say: “I don’t want to call somebody about this product. I want all the information online so I can make a decision. I don’t want to meet with someone or fill out a piece of paper.”
But when it comes to benefits, millennials’ reliance on technology and self-service might be overstated. Face-to-face meetings are still important, even for this generation, says The Standard’s Daily. “I think sometimes [employers] may be thinking it’s got to be glitzy, that they’ve got to text [millennials] or something like that, but really just sitting down with a millennial and going over what these benefits mean … I think it’s the cornerstone to helping them make the right decision.”
The Eastbridge data appear to back up Daily’s assertion. When asked which of several ways they prefer to learn about voluntary benefits, just over half (55%) of employees representing a spectrum of ages chose “speaking with someone in person.” Twenty-one percent, meanwhile, chose “on my own.”
Daily also emphasizes employers shouldn’t feel they have to do all this communication on their own. In fact, she recommends they turn to their benefit brokers and carriers first, before starting any kind of communication program about voluntary. Another tactic, she says, is using peer-to-peer discussions.
“The millennial generation really values recommendations. If you think about looking for a new restaurant you think about Yelp, and the same thing applies to deciding to select disability coverage,” she says. “They’re going to look to their peers to help them make that decision, so having real stories about why colleagues chose to enroll in a benefit may be just what that millennial needs to make that decision to enroll.”
In addition, employers can leverage other successful communication campaigns. “Employers should really think about anything they’ve already done where they successfully communicated to employees and leverage that strategy,” says Daily. “I would look to the leaders of that event and say: ‘What did you do and why did it work?’ Employers may already have some of the skills and they just aren’t thinking about it in that way.”
And while it might seem like a no-brainer, an online enrollment system that facilitates a seamless shopping experience is important for millennials and all employees, for that matter. Not only that, but a mobile site that’s easy to navigate whether employees are using their laptop, iPhone, iPad or Android device.
“If I get an email from Amazon promoting a product I really want and I click on that email and then go on a wild goose chase to find that product, you’re going to lose users and buyers,” says Hill, who also cautions that all the benefit communication in the world is for naught if the buying experience isn’t simple. “If I do a great job communicating these benefits to millennials and then they have to go on to a system that looks like it was built in 1995, and the initial communications are very different than the actual purchase experience, we think that’s really bad. You’re going to lose millennials, who are used to things being easy.”
Among Spotlite’s clients, about 15% of employees use a mobile device to shop for benefits. As mobile devices and smartphones get more sophisticated and make inroads among older generations, Hill only expects this to grow. “Mobile is necessary. It’s something you have to have,” he says. “Enrollment needs to be easy for the end user. So you make it easy by offering it on a computer or a mobile device. It’s a necessary access point for individuals.”
DOL cracks down on employer 401(k) issues
Originally posted March 31, 2014 by Scott Wooldridge on www.benefitspro.com
The press release headlines are sobering: “U.S. Labor Department files suit to remove trustees,” “Department of Labor files suit to recover unpaid contributions to 401(k) plan,” and “Judge orders trustees to restore losses.”
The Department of Labor website is overflowing with cases of regulators taking action against employers accused of mishandling employee benefit plans.
Among the most common cases: errors in administering 401(k) plans. Although Labor Department officials and experts in the ERISA field say the majority of cases are errors in reporting and do not result in civil lawsuits, the numbers of benefit plan cases investigated (of all kinds) are still impressive: the DOL closed 3,677 investigations in 2013, with nearly 73 percent of those resulting in monetary fines or other corrective action. Lawsuits were filed in 111 of those cases.
The department says it is working to educate employers about how to avoid errors, including conducting seminars and providing information on the DOL website.
In a March 21 blog post, Phyllis Borzi, assistant secretary of Labor for employee benefits security, noted that employers could find it challenging to administer benefits such as 401(K) plans.
“Most fiduciaries — people who have key responsibilities and obligations to an employee benefit plan — and employers want to do the right thing,” she said in the piece. “However, inadvertent mistakes can create significant problems for fiduciaries and participants.”
The problems can lead to substantial monetary fines and settlements.
In January, for example, the DOL announced that a Chicago-area manufacturing firm, Hico Flex Brass, would pay $79,000 to settle a case in which the company failed to properly distribute 401(k) earnings to employees.
A Jan. 10 complaint by the DOL asked the courts to rule that a machine shop in Santa Maria, Calif., should restore $58,000 in 401(k) contributions that the company improperly mixed with other business accounts.
For large companies, the costs are even higher.
A lawsuit brought by employees of International Paper resulted in a $30 million settlement in January, although that case was litigated by a law firm and not the DOL.
Even when the dollar figures aren’t as high, cases involving 401(k) administrative errors can hit small and medium-sized employers hard.
Lawyers who work on employee benefits cases say many employers don’t pay close enough attention to the complexities of administering retirement plans.
“It’s just difficult at times for employers to keep up and attend to all the details,” said John Nichols, an employment benefits lawyer with Minneapolis-based Gray Plant Mooty. “The rules are complex, and the administration of the plans is correspondingly complex.”
Plenty of room for error
“The reality is that running a benefit plan such as a 401(k) plan has a lot of room for error built into it,” said Stephen Rosenberg, an ERISA attorney with The McCormack Firm, based in Boston. “Many of these small and medium-sized companies are focused on running their business. They need to provide a 401(k) as an employee benefit but they don’t really have the internal resources to do this.”
Rosenberg said even large businesses often stumble with retirement plan administration. “Retirement plans, including 401(k) plans, are probably more regulated than anything in American economic life short of nuclear power plants,” he said. “It’s very difficult for any company not large enough to have a dedicated legal staff to hit every hurdle correctly.”
Nichols said that the DOL tends to investigate certain areas of plan administration pretty consistently. “You see a lot of similarity” of the cases, he noted. “One exercise (employers can consider) is to go down the list of typical cases and say, ‘How are we doing in each of these areas?’”
Common pitfalls
So what are the areas the DOL tends to investigate? The experts interviewed for this story agreed that there are several areas where problems may trigger a DOL investigation of employers.
One is failing to make a timely remittance to the 401(k) plan. Under federal rules, funds from an employee’s paycheck have to be submitted to their retirement account no more than 15 days after the money is withheld from the paycheck.
A second common issue is making sure employees get their statements in a timely manner. Proper disclosure of fees owed to the plan’s fiduciaries (the company in charge of administering the funds for the plan) is another area that DOL looks at closely. And some companies have been found noncompliant for failing to maintain fidelity bonds for their plans, a safeguard against misuse of funds.
“I do see companies who are loose about when they make deposits; they just treat it like the rest of the cash flow in the company,” said Rosenberg.
Avoiding costly mistakes
Rosenberg and Nichols said there are several steps employers can take to avoid trouble with DOL regulators.
They both said companies need to take their fiduciary responsibilities seriously, and not expect that a retirement plan will run itself. An important first step is keeping good records.
“If you have a committee that is responsible for the administration of the plan or its investments, make sure that they meet regularly and that you keep a good record of committee actions, what’s discussed, and how decisions are made,” Nichols said.
Getting help
Rosenberg said companies need to be realistic about whether they have the time, resources, and knowledge to administer and monitor retirement plans themselves.
“The key in many ways for smaller and midsized companies is really to find a very good outside consultant — and I don’t mean your vendor,” he said. “If you have a huge company you have a department to do this. If you’re not, bring in a consultant and outsource that role.”
Nichols agreed that the vendor — the financial services company that provides the investment plan — has a limited role. “Vendors are pretty good at allocating accounts and providing access to account information,” he said. “That doesn’t mean that the whole job is done. You didn’t get a totally turnkey product. There are things you need to do as well.”
Failing to watch, of course, could mean triggering a DOL action.
“There’s always a monitoring responsibility,” a DOL spokesperson said. “The criteria we use is, ‘You should have known. You might not have known, but you should have known.’”
Why it's critical to monitor life insurance policy performance
Originally posted on April 11, 2014 by Henry Montag, E. Randolph Whitelaw on www.lifehealthpro.com
Have you ever discovered a bank entry error in your checking account register, resulting in $100 or $1,000 less than what it should be? Imagine how much worse it would be if your client’s $1,000,000 life insurance policy’s death benefit was suddenly unavailable to a spouse or child due to a technicality. Unfortunately, as a result of sustained low interest rates over the last twenty years, as well as policy owner and trustee inattention to performance monitoring, approximately 35 percent of existing non-guaranteed life insurance contracts are expected to expire prior to an insured’s normal life expectancy.
Very few lay people and professionals are aware that their life insurance contracts can expire prior to their lifetime. Clients and trustees often incorrectly assume that either the agent or the insurance company is monitoring their contracts to make sure they will always remain in force, but that’s not true. As a matter of fact, it would be in the insurance company’s best financial interest if, after all those years of paying the premium, it became exorbitantly expensive to maintain the contract and the death benefit had to be reduced or the policy surrendered. According to Donald Walters, General Counsel for the Insurance Marketplace Standards Association, (IMSA), “While insurers have not publicized the issue, there is a growing concern in the industry about lapsing universal life policies.” Carriers and agents have no obligation to monitor policy performance relative to original performance expectations. Carriers are merely required to send a scheduled premium billing and an annual policy value statement. It is solely the responsibility of the policy owner to review the policy value statement and determine the needed premium adjustment to achieve originally illustrated policy values.
In August 2012, the Office of the Comptroller of the Currency (OCC) issued revised guidelines, which directs financial institutions serving as trustee of an insurance trust to treat life insurance as they would any other asset. This means life insurance, just like stocks, bonds and real estate, needs to be actively managed. Providing a policy performance evaluation and then monitoring it every 1-3 years, depending upon product type, is the only way to determine whether a life insurance contract issued in the 1980s is in danger of expiring prematurely. These universal life or variable universal life insurance contracts, unlike their more expensive whole life counterparts that have lifetime guarantees, are not guaranteed for a lifetime. This is because their performance was tied to an anticipated annual interest crediting rate, or an anticipated stock index performance, neither of which was guaranteed, and neither of which were achieved.
In the mid-1980s, when prevailing interest rates were as high as 18 percent and life insurance companies were crediting guaranteed policies much lower rates, thousands of astute policyholders switched the accumulated cash value in their whole life contracts into higher yielding bank deposit instruments.
In order to stop these outflows, the life insurance industry created a new product called universal life insurance.” These policies paid an interest rate based on prevailing market interest rates instead of a fixed rate, as had been the case in their traditional whole life contracts. If interest rates increased, then the scheduled premium could be decreased or remain unchanged for policy coverage to remain in force. What was not clearly understood, however, was that, if interest rates decreased, then the length of time the coverage would remain in force would consequently be reduced, or a greater annual premium deposit would be required in order to prevent an early expiration of coverage.
When universal life was first offered, agents and brokers would ask their clients how long they wished the coverage to remain in force. Clients would typically respond that they wanted the coverage to last until age 90–95. Next an interest rate assumption was made for the time period between the insured’s current age and this age 90–95 target in order to generate a computer illustration calculating the anticipated annual premium needed to keep the policy in force. However, this scheduled premium amount was not guaranteed.
While the introduction of this interest-sensitive product solved the outflow problem for the insurance industry, it has created other problems for policy owners in the last ten years due to policy owner misunderstandings and inattention. Few policy owners or “amateur” trustees understood that they carried performance risk. Moreover, they did not know which risks to monitor or have the tools to do so. As interest rates declined, they simply paid the scheduled premium, unaware that the policy would lapse much earlier than insured age 90-95 unless the scheduled premium amount was increased. This fact has created a crisis of lapsing policies that requires corrective action.
To avoid lapse risk, a policy performance evaluation of a universal life, variable universal life or indexed universal life contract should be independently conducted to determine, at a minimum, (1) the probability the current premium will sustain the policy to the insured’s life expectancy, (2) the insured’s age at policy lapse, (3) the competitiveness of the policy charge, and (4) the needed correcting premium to sustain the policy to the insured’s life expectancy. Inforce carrier illustrations disclaim predictive value. Hence, an actuarially certified evaluation should be obtained. Also, for older insureds, a life expectancy report should be considered so that the premium payment period is based upon the insured’s medical history and current medical condition.
The more advance notice an insured or trustee has about a potential premium shortfall, the less additional monies are needed to adjust the coverage back to its originally projected level. Since cost of insurance charges increase annually, annual performance monitoring and periodic premium adjustment avoids a lapse notice ‘surprise’ that requires a significantly higher premium to maintain the policy inforce.
Whether there was transparency and full disclosure in the initial marketing and ongoing annual policy statements for these products can be debated but performance risk rests with the policy owner. The combination of low interest rates and the fact that the octogenarian demographic is the fastest growing segment of the population has created a ticking time bomb for lapse. Corrective action is needed, and it can only be taken by the policy owner.
If the policy is owned in an irrevocable life insurance trust (ILIT), the trustee has the sole duty and responsibility to manage the trust asset. Inattention poses reputation and litigation risk for corporate trustees, and reputation risk for legal and tax advisors to amateur trustees, especially family members serving as an accommodation and relying solely upon these advisors for all trust administration functions. It is estimated that 90 percent of inforce Trust-Owned Life Insurance (TOLI) policies are administered by unskilled amateur trustees, meaning that credible professional assistance is needed to create a prudent and reasoned process that maximizes the probability of a favorable outcome to the trust estate.
In regard to corporate trustee duties, the OCC offers excellent prudent process guidance. For example, policy performance evaluation should examine the financial health of the issuing insurance company, and consider whether the policy is performing as illustrated. If the policy is underperforming, or if the policy can be improved upon, the fiduciary should consider replacement or remediation. If a trustee lacks the expertise to evaluate the premium adequacy risk or the contract’s appropriateness to fulfill the beneficiary’s objectives, the trustee has a duty to delegate and engage the necessary experts to make these determinations and assist in the suggested remediation steps.
In addition to regularly evaluating and monitoring a life insurance contract, individual policyholders should also consider the availability of newer products that were not available when the contracts were initially purchased. For example, a chronic care rider, which first became available at the end of 2011, allows an individual to withdraw up to $116,000 tax free in 2013 (adjusted annually for inflation), from the death benefit of a life insurance contract to pay for qualifying long-term care expenses. There is no reason not to have this benefit available in any life insurance contract.
Finally, the need for inforce TOLI policy attention usually triggers uncertainties as to how to get started in implementing a prudent process. Establishment of an Investment Policy Statement (IPS) is just as important for life insurance as it is for fixed income and equity investments. An IPS should:
- Update death benefit requirements
- Summarize ILIT parties and their responsibilities
- Identify trustee risk management criteria
- Identify policy and product evaluation duties and how they will be provided
- Affirm beneficiary communication requirements
An Investment Policy Statement and credible inforce policy evaluation can help ensure the longer-term planning objectives of a policy owner as well as provide safeguards for the trustee. The tools for prudent and reasoned life insurance policy performance monitoring are readily available — they just need to be used.
Weighing a Rollout of Benefits for Employees? 4 Tips for Startups to Consider
Originally posted by Jennifer Fitzgerald on https://www.entrepreneur.com
Should a startup company offer employees benefits? That question cuts to the core of any entrepreneur's most significant challenges: cash burn, talent recruitment and company values.
But founders of startups might find it wise to consider offering employees certain benefits to help build the company’s culture. Here’s why:
Benefits are more valuable to employees than you think. MetLife’s annual study of employee benefits trends found that benefits can be even more important than advancement opportunities and company culture in fostering employee loyalty. That’s important for founders of startups to know, considering the fact that recruiting takes a massive investment of time.
And benefits may not be as expensive as you think. Okay, free Friday massages might be. But health insurance is certainly more affordable for small businesses now than it’s been in recent years, due to new offerings under the Affordable Care Act.
And by offering benefits, you company can stand out from the pack. Only 28 percent of businesses with fewer than 10 employees offer health insurance. If you can afford it, then your company will have a recruiting edge.
If you’re convinced that you should provide your employees benefits, here’s what you should do:
1. Start with the basics. You want a healthy team that won’t get financially rocked by a trip to the emergency room. That means you should provide health insurance and disability insurance.
Retirement contributions, gym memberships, catered lunches and the like should all wait until your business becomes financially stable. Also, they don’t deliver as much bang (in terms of employee satisfaction) for the employer's buck as good health-care coverage.
Arrange for a solid but not extravagant group health-insurance plan to keep costs in check. Many employess at startups are relatively young and healthy. For them, a bronze- or silver-level plan is appropriate. (Usually, premiums will run $200 to $300 per employee per month). Find a plan that makes people stick to a network (an HMO or EPO), which will keep your costs down.
Disability insurance is also an important but often overlooked offering. This type of coverage pays a cash benefit if an employee is unable to work as a result of injury or illness. If you can afford to pay 0.5 percent to 1 percent in compensation per employee, then you can offer short-term and long-term disability insurance.
2. Manage expectations. Consider what you can afford to spend on benefits for each new hire. Build it into your baseline hiring costs and don’t change this figure unless you’re improving it.
Avoid a reduction in benefits. Nothing will have your employees grumbling faster than that. (This is because of a human behavioral quirk called the endowment effect.) It’s better to start out conservatively with your benefits offerings and improve them over time as your budget can absorb them.
For reference, small companies that provide health insurance to employees contribute on average per employee $857 per year for individual coverage and $3,346 per year for family coverage. Contribute only what you can afford. And remember that only 28 percent of small companies offer health insurance at all. Contributing even a small amount for employee health insurance places you well ahead of the pack.
3. Take advantage of health-insurance subsidies. The Affordable Care Act offers subsidies (as much as 50 percent of the cost) to small businesses that provide health insurance to employees. To qualify, the business must have fewer than 25 full-time employees, pay on average annual wages below $50,000 and contribute 50 percent or more toward premiums.
For startups not eligible for the subsidy, taking advantage of individual health insurance is also an option. Individual health insurance costs about the same per person as small-group health insurance. So, a startup could have employees buy their own individual health-insurance plan on the relevant state marketplace and reimburse them for premiums.
4. Get a broker. Founders don’t have time to deal with the complex world of insurance benefits. Let a broker handle it for you. Best of all, there’s no extra cost. Brokers are compensated by insurance companies through commissions, which have already been built into insurance prices. They’ll run quotes, give you guidance and manage the paperwork for you.
Business owners can figure out what they want and what they're comfortable spending and let a broker manage the rest.
Most workers happy with their benefits, salaries
Originally posted December 20, 2013 by Amanda McGrory-Dixon on https://ebn.benefitnews.com
When it comes to their health benefits, most employees say they’re happy with their current offerings and lack interest in altering their balance of benefits and wages, according to a new survey by the Employee Benefit Research Institute.
Specifically, 12% of respondents say they are extremely satisfied with their plans, 39% of respondents say they are very satisfied, and 37% of respondents say they are somewhat satisfied. Just 10% responded in a negative fashion. Since the survey was first initiated, the number of respondents who report feeling happy with their benefits has generally been high.
“By far, health insurance, in particular, continues to be the most important employee benefit to workers,” says Paul Fronstin, director of EBRI’s Health Research and Education Program and author of the survey.
The survey also finds that there is uncertainty whether employers will still offer health insurance for employees in the future because of the Affordable Care Act; however, benefits are a key factor in choosing a job.
“While there may be a lot of questions about the future of the American health insurance system, the majority of those who have health coverage like the plan they have,” says Ruth Helman of Greenwald and Associates, co-author of the report.
If changes to tax preferences for employment-based health coverage were implemented, making benefits taxable, 39% of respondents report that they would keep their current amount of coverage. This is nearly at the same level of 40% in 2012, though up from 31% in 2011.
According to the survey, most respondents agree they would like more choices in health plans; however they are not sure that they could choose health insurance, much less the best plan, using an objective rating system, which is included in the exchange system.
Instead, 35% of respondents say they prefer to keep receiving health insurance from their current plans while 45% of respondents report that they would rather choose their insurance and have their employers pay what they are paying now for that coverage. Another 21% say they would prefer their employers give them money to spend on health insurance as they please.
Regulation Roundup: The Hits Keep On Coming
Source: United Benefit Advisors
The federal government in the past few weeks has kept up the fast pace of pumping out benefits-related guidance -- a trend that started at the end of 2012 -- with a set of final and proposed regulations for the health care reform law, a final HIPAA rule and a compromise on the Obama administration's coverage requirement for contraceptives.
HIPAA: The Department of Health and Human Services (HHS) released its HIPAA omnibus final rule in late January. The final rule establishes new rights for individuals to access their health information, calls for updates to business associate contracts, beefs up privacy protections for patients and gives the government more power to enforce the law, according to a HealthLeaders Media article.
Employers should expect tougher policing of HIPAA-related infractions by federal agencies, experts say.
"The 'good old days' of voluntary compliance and 'slaps on the wrist' seem to be a thing of the past," Brad M. Rostolsky, a partner with Reed Smith, LLP, told HealthLeaders Media. "As a result, it's important that regulated businesses, from the top down, are seen to have buy-in to HIPAA compliance efforts."
Contraception Compromise: HHS has tweaked its requirement that religious nonprofit organizations provide their female members coverage for birth control, according to a PPACA Advisor release from United Benefit Advisors (UBA). Instead, insurance companies, after being notified of the employer's objection to the coverage, would be required to provide coverage at no cost to workers through separate policies. If the employer is self-insured, it can use a third party to set up a separate health policy that would provide coverage for contraceptives. The costs for this action may be be offset by the fees that insurers will pay to participate in the government-run health care exchanges, slated to go online in 2014.
Affordability: The IRS finalized a rule that clarified that the health coverage "affordability" requirement (that an employee's premium contribution not exceed 9.5 percent of household income) under the Patient Protection and Affordable Care Act (PPACA) will be based on self-only coverage, according to a Business Insurance online report. Employers with plans that fail that test face a $3,000 penalty for each full-time employee who is not offered affordable coverage and instead receives a premium subsidy from the government to purchase insurance in a health care exchange. The proposed regulation left open the possibility that the affordability test might have applied to family coverage, but the IRS removed that scenario with its final rule.
HRAs: A new set of frequently asked questions posted by federal agencies limits the use of health reimbursement arrangements (HRAs) in the coming government-run health insurance exchanges, an online report by the Society for Human Resource Management (SHRM) notes. The FAQs state that an HRA that is not integrated with a group health plan but instead functions as a "stand-alone" benefit falls under the PPACA provision that limits the annual amount an individual is required to spend on health care coverage. The report points out that this restriction means funds from stand-alone HRAs can't be used to buy individual coverage through the online exchanges, slated to open in 2014.
Timothy Jost, a professor at Washington and Lee University School of Law, told SHRM that many employers were hoping to offer employees "a fixed-dollar contribution" through an HRA. Such a move "would permit the employee to take advantage of the tax subsidies currently available through HRA coverage but get the employer out of the health insurance business." For many employers, this now will not be possible.
Minimum Coverage: A proposed PPACA rule clarifies what types of services would be considered "minimal essential coverage," UBA reports. Services such as on-site clinics, limited-scope dental and vision, long-term care, disability income and accident-only income would not qualify as employer-sponsored minimal essential coverage. More details can be found in the Federal Register: https://www.gpo.gov/fdsys/pkg/FR-2013-02-01/pdf/2013-02141.pdf
Exchange Notice Delay: Employers who were concerned about a fast-approaching deadline to distribute notices on the exchanges can relax for a few more months. The Department of Labor (DOL) has pushed the date (originally March 1) to late summer or early fall. The DOL is preparing model language for the notice, and a final date will be announced later, the agency said.
Top-Bottom Buy-In Can Bolster Benefit Communications
Benefits can play a crucial role in fueling employee engagement, which can in turn lead to better productivity and talent retention.
Unfortunately, even the best benefit communications strategy can miss the mark if it happens infrequently and leaves out management, experts say.
Nowhere is the engagement challenge more evident than in health care benefits, where rising costs have driven many employers to focus their engagement efforts toward wellness and health consumerism, Erin M. O'Connor of Cammack LaRhette Consulting told Human Resource Executive Online.
"People tend to listen to their boss, not necessarily to HR," O'Connor said. "So to get those gains in productivity and reductions in benefits spend, you've got to have engaged managers and business leaders promoting health and well-being."
O'Connor suggests that employers can motivate management to help spread the word about wellness and other benefits by demonstrating how productivity loss and absenteeism -- byproducts of poor health -- can impact individual departments within the company.
While this "trickle-down" method of engagement may take some time, the ultimate result of a more engaged workforce can be a boon for employers, new research suggests.
Employees who are satisfied with their employer-sponsored benefits package are nine times more likely to stick with their current employer, according to a new study by Aflac, reported in Employee Benefit News. In fact, workers ranked benefits above compensation in importance, with 75 percent responding that they'd be at least somewhat likely to take a job with lower pay as long as the benefits were good.
To keep managers and workers aware of robust benefits, employers should focus on constant and consistent communications, according to Jennifer Benz, a benefit communications consultant. Benz notes in a recent CCH online report that social media tools can strengthen an engagement campaign without a major drain on HR's time or budget.
"Reminding employees about benefits once a year is not enough to get them actively engaged in decisions about their health and financial well-being," Benz said. "The key . . . is feeding them bite-sized chunks of information year-round."
Benz said blogs (including micoblogs such as Twitter), podcasts/videos, social networks such as Facebook and web-based forums can provide a way to inform and remind employees about the value of their benefits.