Employees Remain Worried About Employer Sponsored Benefits

Friday, November 16, 2012

Results from Gallup’s 2012 annual Work and Education poll indicate that employees remain worried about the continued availability of their employer sponsored benefits.  The annual poll, based on a random telephone sample of 1,012 employed adults in all 50 states and the District of Columbia was conducted between August 9th and 12th and posed several questions on how worried respondents were concerning their compensation, benefits, and continued employment. When the surveyor asked if they were worried their benefits would be reduced, 40% said, “yes”. What is revealing about this statistic is that in the same poll taken in 1997, the “yes” response rate was 34%, a difference of only 6 percentage points. Considering the reported total sample margin of error is ±4 percentage points at the 95% confidence level, employees’ level of “worry” today is not that much higher than it was in 1997.

              Source: Gallup’s 2012 annual Work and Education poll

Employer sponsored benefits are expensive, the U.S. Bureau of Labor Statistics estimates that total private employer provided benefits represents over 29% of an employee’s total compensation. The largest component of this at 8% is “Legally Required” benefits which include: Social Security, Medicare, unemployment insurance, and workers’ compensation. The second largest component, as if we did not know, is “Health Benefits” at 7%. It is fairly easy to understand how employees have concerns over benefit reductions since benefits represent such a large proportion of the employer’s costs.

While the last several years have focused center stage on a national debate on health care, many employers have struggled with funding their retirement and savings plans, both defined benefit (DB) and defined contribution (DC) plans. During the recession, as investment returns declined and remained low, employers and employees alike saw the performance of their DB and DC plans suffer. Since employers are mandated to maintain a certain funding level for their DB plans they had little choice but to deposit additional monies into those plans. However, many employees, faced with a declining 401(k) balance and reduced hours, furloughing of employer match or outright job loss, lacked the ability to invest more to offset low returns.

Over the last three decades, defined benefit (DB) plans have been largely replaced by defined contribution (DC) plans and hybrid plans, placing the majority of retirement responsibility on the employee. Witnessing the continued erosion of DB plans must be a contributing factor to employees’ angst related to the potential loss of benefits. The trend from DB pension plans is also mirrored in the movement of employers to “consumer driven”, i.e., high deductible health care plans. In both cases, shifting from DB to DC pension and health care plans places an increased burden of risks on the individual employee. While this may seem unfair, it is the employee who has the most to win, and yes lose in a defined contribution scenario. Key to the employee winning is the power of financial management knowledge, gained either on their own or with the help of the employer.