The Rise of the Employee Driven Benefits Model

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1 Prudential s Group Insurance Real Challenges. Real Solutions. Real Results. The Rise of the Employee Driven Benefits Model A Companion Report to Prudential s Fifth Annual Study of Employee Benefits: Today & Beyond

2 The Rise of the Employee Driven Benefits Model A Companion Report to Prudential s Fifth Annual Study of Employee Benefits: Today & Beyond This companion report to the Fifth Annual Study of Employee Benefits: Today & Beyond from The Prudential Insurance Company of America provides quick access to the most salient findings as related to one of main report s key themes: The Rise of the Employee Driven Benefits Model. This theme focuses on the paradigm shift occurring in the employee benefits industry as employers increasingly place greater responsibility on their employees to fund and make decisions about their benefits options. The model for employee benefits delivery in the U.S. is shifting and putting greater responsibility on workers. Over the past three decades, the employee benefits model has evolved, with significant changes occurring in the past five years. Benefits cutbacks are only part of the story. Plan sponsors have been gradually giving more and more financial and decision-making responsibility to their employees. Increasingly, employers are taking a different approach to their employee benefits programs. For example, cost-sharing, which was the lowest-rated benefits strategy in 2007, is now near the top of the list and has grown the most in importance (+15 percentage points) over the three-year period. Plan sponsors also rate giving more financial responsibility to employees through consumer-directed health plans (CDHPs), etc. much higher in importance than they did in 2007 (34% vs. 21%, respectively) an increase of 13 percentage points. Brokers/consultants are experiencing this shift, as well, and they are playing a critical role in shaping the changes in the benefits model. In fact, brokers/consultants rate cost-sharing as the top-rated employee benefits strategy among their clients; more than two-fifths (43%) cite it as highly important to their clients. One in three brokers rate giving more financial responsibility to employees as highly important to their clients. IMPORTANCE OF BENEFITS STRATEGIES PERCENTAGE OF PLAN SPONSORS RATING EACH ITEM HIGHLY IMPORTANT Change Cost-sharing asking employees to bear a greater portion of the costs of benefits 19% 34% +15 Giving more financial responsibility to employees through high deductible health plans, health savings accounts (HSAs), etc. 21% 34% +13 2

3 Two factors are accelerating this change the economy and the recently passed health care legislation. This nation has experienced an ongoing chain of economic events in recent years. Also, the current administration passed a landmark health care reform bill in March Both of these factors the economy and new health care legislation are influencing this shift in employee benefits. Nearly half of all plan sponsors (47%) say that recent economic conditions have impacted their company s employee benefits strategy to some extent. Those who have been most negatively affected by the economy seem to be moving quicker to this new employee-driven model. They are more likely to say cost-sharing is a highly important strategy, compared to others; this seems to come at the expense of other strategies. They are also less likely than others to rate increasing employee education/advice as a highly important benefits strategy. It s clear that the down economy is playing a role in changing the benefits model. IMPACT OF ECONOMY ON BENEFITS STRATEGY PERCENTAGE OF PLAN SPONSORS RATING BENEFITS STRATEGY HIGHLY IMPORTANT Impact of Economy on Company s Business in Past Six Months Very Positive Impact Very Negative Impact Sharing more of the cost of contributory benefits with employees 28% 43% Implementing consumer-directed health plans 32% 39% Increasing employee benefits education and/or financial advice 33% 26% % of all respondents 15% 27% Area of significant difference Though the health care bill was signed into law just prior to this survey being conducted, plan sponsors anticipate that health care reform will impact employee benefits in a variety of ways. While no one knows for sure what the long-term impact will be, employers expect that the greatest impact of the law will be on how benefits are funded and how much companies contribute to benefits (about 40% saying high impact ), followed by the number of benefits offered (36%). Additionally, nearly one-third expect employee benefits service and support to be greatly impacted, as well as the shift of employee benefits to consumerism/employees. 3

4 IMPACT OF HEALTH CARE BILL ON BENEFITS STRATEGY PERCENTAGE OF PLAN SPONSORS RATING EACH ITEM HIGH IMPACT % of Plan Sponsors Employer contributions to employee benefits 41% Employee benefits funding 40% The number of employee benefits offered 36% Employee benefits service and support 31% The shift of employee benefits to consumerism/employees 31% Employee benefits communications 29% The level of internal support by benefits department 24% Companies that expect health care reform to have a significant impact on employee benefits (high degree of impact on at least three of seven items rated) are even more likely to shift to an employee driven benefits model. For example, they are more likely than other plan sponsors to say that giving more financial responsibility to employees via CDHPs is their top employee benefits strategy; 40% say it is highly important, which is significantly higher than among other plan sponsors (31%). They are also more likely to rate cost-sharing as a highly important strategy (38% vs. 31% for all others). With such momentous events occurring in the U.S., it s no wonder that businesses are expecting that their firms will be making major adjustments to the way they handle employee benefits. IMPORTANCE OF BENEFITS STRATEGIES BY IMPACT OF HEALTH CARE BILL PERCENTAGE OF PLAN SPONSORS RATING EACH ITEM HIGHLY IMPORTANT High Moderate to Impact Low Impact Implementing consumer-directed health plans 40% 31% Sharing more of the cost of contributory benefits with employees 38% 31% % of respondents 40% 60% Area of significant difference 4

5 Plan sponsors and brokers/consultants expect the shift toward an employee driven benefits model to continue. This trend in employee benefits seems to be here to stay. Plan sponsors and brokers/consultants report that strategies that move more responsibility to employees will only continue in prevalence and importance going forward. Plan sponsors and brokers/consultants expect that strategies related to cost-sharing and giving more financial responsibility to employees will be the most important over the next five years. About half of plan sponsors expect cost-sharing and/or giving employees more responsibility to be highly important by the year 2015 this is about a 20 percentage point increase from today. While not considered a leading strategy by 2015, increasing the number of employeepaid or voluntary options is expected to see substantial growth over the next five years among brokers/consultants and plan sponsors 14 and 22 percentage points, respectively. This shift toward a more employee driven benefits model and the increase in voluntary benefits will allow for more employee choice and personalization, as well as enhance the perceived value of the overall benefits package. IMPORTANCE OF BENEFITS STRATEGIES CURRENT VS PERCENTAGE OF PLAN SPONSORS AND BROKERS/CONSULTANTS RATING EACH ITEM HIGHLY IMPORTANT Plan Sponsors Brokers/Consultants Projected Projected Difference Difference Sharing more of the cost of contributory benefits with employees 34% 53% % 64% +21 Implementing consumer-directed health plans 34% 52% % 61% +28 Increasing the number of employee-paid (voluntary) benefits options 20% 34% % 44% +22 5

6 Voluntary benefits are becoming an integral part of the benefits equation for many plan sponsors and their employees. As benefits costs continue to rise, options decrease and employees take on greater financial/decision-making responsibility; voluntary benefits (or those offered through the workplace and paid 100% by the employee) may increasingly meet the needs of plan sponsors and their employees. Among plan sponsors who offer voluntary benefits, two in five (42%) expect employee participation in voluntary benefits to increase due to the economy. Brokers/consultants feel even stronger about this; 63% think employee participation in voluntary benefits will increase due to the state of the economy. Consistent with that, about two in five brokers/consultants (39%) anticipate that employers demand for voluntary benefits will increase greatly in the next five years. EMPLOYERS AND BROKERS EXPECTATIONS ABOUT PARTICIPATION IN AND DEMAND FOR VOLUNTARY BENEFITS Expect Employee Participation in Voluntary Benefits to Increase Due to Economy Expect Employers Demand for Voluntary Benefits to Greatly Increase by % 42% 39% Employers Brokers Brokers More employees are selecting voluntary insurance benefits, perhaps as an alternative to having no coverage or to purchasing coverage outside the workplace. In the past year, one in five plan participants (20%) added a new voluntary coverage through their employer, while only 8% say they dropped existing coverage. Furthermore, they appear to have a better understanding and appreciation of the value of voluntary benefits. Two-thirds of plan participants say that offering voluntary benefits increases the value of their employers overall benefits package, compared to 59% last year. Yet, employees are looking for more information on their benefits. More than one-third of plan participants say they would be interested in additional help and/or advice on the following benefits: critical illness insurance (39%), disability insurance (34%), and long-term care insurance (34%). 6

7 Prudential s Fifth Annual Study of Employee Benefits: Today & Beyond was conducted via the Internet during April and May of 2010 and consists of three distinct surveys: A Plan Sponsor Survey among 1,358 benefits decision-makers A Plan Participant Survey among 1,200 full-time employees age 22 or older, who work for a company with at least 50 benefits-eligible employees A Broker/Consultant Survey among 703 group employee broker/consultants who work full time for a company with at least 50 employees The research was conducted for Prudential by the Center for Strategy Research, Inc., an independent Boston-based market research firm. The Prudential Insurance Company of America, 751 Broad Street, Newark, N.J The Prudential Insurance Company of America. Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities