While employer costs for their workers’ health care planscontinue to rise, their share of workers’ retirement costs continueto decline. But at what point does that trend negatively affectproductivity, and ultimately the employer’s bottom line?

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Willis Towers Watson addresses that dilemma and other benefitstrends across industries in its report, “Shifts in benefit allocations among U.S.employers.”

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“Delivering a benefit package that employees value has neverbeen more important, as employers struggle to retain key employeesat a time when compensation budgets remain flat,” the study says.“Uncertainties about their own prospects as well as the broadereconomic landscape have made financial security more valuable toemployees and their families. Failing to address employees’concerns could become a drag on employee engagement and productivity,ultimately hurting employers’ bottom line.”

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The firm analyzed information in its proprietary database ofretirement and health care programs at over 500 employers with atleast 200 employees, and found that active health care costsdoubled from 2001 to 2015, rising from 5.7 percent to 11.5 percentof pay. While this analysis focuses only on employer cost,employees’ share of premiums and point-of-care costs has also risensignificantly over the analysis period, so health cost burdens havegotten heavier for both employers and employees.

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Conversely, total retirement costs declined by 25 percent between2001 and 2015, from 9.1 percent to 6.8 percent of pay. Over thatperiod, many employers shifted away from defined benefits plans astheir primary retirement vehicle, typically replacing them with anenhancement to the existing defined contribution plan. In fact,defined contribution benefits increased by 1.6 percentage pointsbetween 2001 and 2015, which wasn’t enough to replace the 2.9percentage-point loss in defined benefit plan benefits. Eliminatingpost-retirement medical plans for new hires and reducing employersubsidies also played a role in reducing overall retirement cost,as post-retirement medical values declined by one percentage pointover the analysis period.

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“These trends reflect a seismic shift in the allocation ofbenefit dollars,” the study says. “In 2001, active health carecosts comprised about two-fifths of benefits, while retirementbenefits made up the remaining three-fifths. By 2015, the ratio hadflipped, with active health care benefits accounting for slightlyless than two-thirds of costs and the retirement share dropping toslightly more than one-third.”

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Across industries, active health care costs are substantial forall sectors, ranging from 10.4 percent of pay in the retail sector,to 12.7 percent of pay in the oil, gas and electricsector.

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However, employer costs for retirement benefits vary much morewidely across industries, averaging 12 percent of pay in the oil,gas and electric sector, compared with roughly 5.5 percent of payin the health care, high-tech and retail industries.

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“Utility, energy and natural resource companies have some of thehighest pension sponsorship rates among sectors,” the authorswrite. “Utilities are typically heavily unionized and generallyprefer to maintain a consistent retirement structure for both unionand nonunion workers. Moreover, many oil, gas and energy jobs arephysically demanding, and defined benefit plans facilitateretirement at an appropriate time.”

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The finance and manufacturing sectors also havehigher-than-average benefit costs as a percentage of pay. Thefinance sector includes insurance organizations, which have highdefined benefit plan sponsorship rates, although banks and otherfinance employers have been less likely to offer defined benefitplans to new hires since the 2008 financial crisis. While manymanufacturers shifted from defined benefit to defined contributionplans over the last decade, most of them beefed up their DCcontributions after closing or freezing the defined benefit plan,and thus provide relatively high-value defined contributionbenefits to newly hired workers today.

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“The high-tech and retail sectors have had low defined benefitplan sponsorship rates historically, as defined contribution plansare probably a better fit for their more mobile workforces —relatively high turnover makes portability more important,” thestudy says. “Defined contribution values have remainedcomparatively low for this group as there typically has not been apension loss to prompt employers to enhance defined contributionbenefits.”

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Now that the shift from defined benefit plans to definedcontribution plans is well established, Willis Towers Watsonrecommends that employers might want to reevaluate theirallocations of benefit dollars to better respond to employees’current needs and concerns.

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“This could consist of more tax-efficient saving mechanisms,such as broader use of health savings accounts, as well as otherhealth plan designs that encourage wiser spending on health careservices,” the authors write. “Whatever the solution, employersneed to balance their costs with the long-term returns on providingbenefit packages that will be highly valued by their workforce, aswell as attract desirable employees and encourage timelyretirement.”

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Katie Kuehner-Hebert

Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.