5 Ways Defined Contribution Helps Create Value for Employers & Employees
The status quo in employer-sponsored benefits rests on a system of “defined benefit,” meaning employers choose one set of benefits that all of their employees will receive – also known as a “one-size-fits-all” benefits package. Liazon was founded over eight years ago to change this flawed system.
We told employers they should reconsider the way they invest in their employees’ benefits by establishing a fixed amount of money to contribute to each one. Then, employees would be free to choose the benefits they wanted from an exchange or marketplace filled with benefit choices, with some guidance to help them make informed decisions. This fixed amount is known as a “defined contribution” and we feel it’s so important that frankly, if some employers don’t buy in to the concept, it’s quite possible they’re not the right employers for a private exchange.
Here are 5 ways employers can create value for themselves and their employees by adopting a private exchange benefits model with defined contribution.
1. Better control of budgets, better value for the dollar
Invariably, employers are faced with rising costs from medical carriers each year and typically have the same unappealing options before them to deal with it: Pass these costs on to their employees, provide a package less rich in benefits, try to find a better deal with a different carrier, or pay the costs and grumble. With defined contribution, employers can determine how much of their overall budget they want to apply toward benefits, including the increases they will tolerate for a few years to come. No guessing, no surprises, and no grumbling.
2. Greater employee retention
The key reason employers offer benefits at all is as a means of attracting and retaining the best employees. So why risk alienating this talent and having them look elsewhere because their benefits are “bad” or “were cut”? Employees already tend to underestimate the value of their employer’s contribution to their benefits (research indicates they perceive about 65 cents for every dollar spent). Why give fuel to this misperception? Exchanges make the total value of benefits transparent for employees and give them a reason to stay with your company.
3. Greater transparency, more engagement
Defined contribution results in transparency when it comes to benefits costs (both the employer’s and the employee’s) and according to Fast Company magazine, “People trust companies who are transparent…Who can trust a company or person who doesn’t disclose information, who keeps everything close to the vest, who doesn’t share anything?” Employees are increasingly understanding that an employer who is willing to turn money over to their employees to spend how they choose on benefits is a trustworthy, forward thinking company.
4. Money put in the right hands
When it comes to their benefits, some employees are more risk averse than others, some have greater medical needs than others, and some are more financially secure than others. There is very little an employer can legally know about these private matters and personality traits and so they can’t pick insurance plans based on individual needs. So by receiving a defined contribution amount from their employer, employees are empowered to get the benefits that make sense for them personally.
5. Better choices
When employees choose their own benefits using their own money, our research shows they take a more active role in using them wisely. They may (and should) opt for more than just medical benefits to create a complete coverage portfolio that may also include dental, life, disability, and a whole host of other coverage, even for legal services or identity theft protection. The renowned economist Milton Friedman said, “Very few people spend other people’s money as carefully as they spend their own.” Guess he would be a fan of private exchanges.
The bottom line: As the industry moves from defined benefit to defined contribution, employers can better control and predict costs and employees get more individualized coverage and become empowered to use their benefits more efficiently.