By Thomas A. McCoy, CLU

The Employee Benefit Research Institute (EBRI) held its 35th Anniversary Forum in December, and it used the occasion to look at how the benefits business has evolved over those 35 years and where the next 35 may lead. With the benefits business appearing to be more in a state of revolution than evolution, the forum provided a useful long-term view.

It included several panels, accessible via Webcast, with experts from a wide swath of the benefits business. In the health care segment, Paul Fronstin, senior research associate with EBRI, sounded a disturbing note by pointing to data from the Center for Medicare & Medicaid Services (see chart on page 64). In 1965, the year that Medicare was enacted, 70% of national health expenditures came from private sources. Since then, the public expenditures have risen dramatically, and projections for the future are for further gains in the public market share.

Fronstin referred to a study by NBGH/Towers Watson (see chart on page 66), which bolsters the view that the private market’s share of health care coverage will continue to shrink. Over a recent five-year period, the study shows, employers expressed increasing doubt that they would be providing health care coverage. Results no doubt were influenced by general uncertainty over the Affordable Care Act.

Commenting on the NBGH/Towers Watson study, Fronstin noted, “We do our own surveys, other organizations do surveys, and we rarely see changes of this magnitude in such a short period of time.” However, he pointed out, there was a slight uptick during 2012 in employers’ long-term expectations for providing health care benefits. “So it will be interesting to see if that represents a reversal in the trend.”

Since enactment of the Affordable Care Act, private health care exchanges have become a fast-growing delivery vehicle for health care benefits. Larry Zimpleman, chairman of Principal Financial Group, told an EBRI panel, “Within three to five years, I think we could see half of all employers providing health coverage through the private exchanges.”

He added that one concern with the adoption of this “defined contribution” approach to health benefits is that employers might tend to cut back on their wellness initiatives. “As a company we’ve been very focused on wellness, and we don’t want to regress from the progress we’ve made in holding people accountable for their own behavior relative to the cost of insurance.”

If health care is the fastest changing segment of the employee benefits business over the past five years, retirement plans may have changed the most over the past 35. The metamorphosis from defined benefit to defined contribution products has created some real concern about retirement income adequacy, particularly since the financial crisis.

Howard Fluhr, chairman of The Segal Group, an employee benefits and HR consulting firm, told the EBRI Forum audience that the financial crisis could have led to a resurgence of DB plans. That didn’t happen, he said, in large part because “the accounting regulations make it so difficult” for companies to operate DB plans and also because “there was no general public demand for it.” However, he suggested, the DB model in some form could be integrated into DC plans to make then more useful in generating adequate retirement income.

“It’s a faulty question to ask what’s better—DB or DC,” said Fluhr. “The answer is they both serve a purpose. For a period of the ’70s and ’80s, the ideal solution was a combination of the two because one has advantages for older workers, one for younger; one has volatility in one place, one in another. Some of the hybrid plans out there now address this. That’s a healthy approach, and it should be encouraged from a public policy standpoint.”

Zimpleman agreed with Fluhr that DC plans might provide a more secure retirement income for their participants if they adopted some of the elements of defined benefit plans. His suggestion: Start with the regulations governing retirement plan distributions.

“In 35 years I’ve heard very little debate about why we facilitate and encourage (DC) plan participants to take lump-sum distributions at retirement. It makes no sense, and in many other countries like the U.K., you can’t. You have to annuitize your account at retirement. That’s probably too draconian for the United States—we’re a land of choices—but having tax law that encourages lump-sum distributions is certainly not the right thing.”

On this and other issues involving public policy dealing with retirement plans, Zimpleman may have hit on the ultimate culprit when he said, “The problem is that retirement systems only work over long periods of time, and the political system is oriented toward shorter and shorter periods of time.”

The current and future workforce
The EBRI Forum also included a panel of speakers who addressed issues involving the makeup of today’s workforce. Among them was Ellen Galinsky, president of the Families and Work Institute, which conducts the National Study on the Changing Workforce. Data is collected through telephone sampling of 3,500 workers, and the study has a better than 50% participation rate and a 99% completion rate.

The most recent study found that Millennial fathers are spending much more time with their children than did previous generations, Galinsky said. “The one finding in our most recent study which has created the most news,” she said, “is that fathers now experience more work-life conflict than women. Men are at 60%; women at 47%. Women’s level has held steady, while men’s has shot straight up.” The likelihood that today’s workers, both men and women, will be providing eldercare is also on the rise, said Galinsky.

Another important finding, she explained, is an increase in the number of people who are “retired” but have gone back to doing some kind of paid work. “We believe this is the start of a long-term trend; 75% of people who are 50 and older say they expect to retire and then continue working.”

Matthew Greenwald, president of Greenwald & Associates, a market research company, said that with workers living longer and working longer over the next 35 years, the employee benefits business will need to respond accordingly. Millennials, in particular, will be most affected during that period of time.

Greenwald suggested that today’s disability plans that are designed to continue only to age 65 could be out of sync with the reality of the risk. “The penalty for stopping work before you want to will be higher,” he said.

He also suggested the need for more portable benefits “to carry beyond work life or into a person’s 70s or beyond.”

Finally, he predicted that medical/technological advances will push up the price of regular health care coverage products.

A generational view
Neil Howe, president of LifeCourse Associates, discussed the massive shifts that are occurring across generations, both during working years and into retirement, and how these might shape the benefits landscape. Howe helps direct the Global Aging Initiative at the Center for Strategic and International Studies in Washington, D.C.

Citing the Federal Reserve’s 2010 Survey of Consumer Finances, he observed, “For the first time ever, households of people age 75 and over have the highest median net worth of any age bracket in America.” Although the Fed’s study was not done in the 1960s, he said, “It would have shown that this age bracket had the lowest median income in the country.” He called it a “rags to riches transition.”

However, Howe says, the next wave of retirees—the baby boomers—will have a much different experience. He agreed with Galinsky’s observation that many “retirees” will be seeking other employment. But he further predicted a decline in retiree wealth from “early boomer” age brackets to later boomers.

The effects of the financial crisis across the workplace have been highly segmented by generation, Howe noted. “Since the employment peak in November 2007, we’ve lost about 3 million jobs, but that’s divided into two different categories. We’ve gained 3 million jobs over age 60. We’ve lost 6 million under age 60. It’s a completely bifurcated distribution, and it’s the result of boomers not retiring.”

Howe predicted other ways the workplace will look different as it shifts from early baby boomers—born closer to 1940—to later boomers—born closer to 1960 (what he called “the Bill and Hillary Clinton” edge of the Boomers to the “Madonna and Michael Jackson” edge). “You’re going to see an increasing percentage of women who never had children—going from around 10% in the earlier group to 20% in the latter. There will be a much larger share of immigrants and minorities, and a gradual decline in net worth and income.

“Generation X—roughly those in their 30s and 40s—will be redefining midlife over the next 20 years,” Howe continued. “They were the hardest hit by the recession. They bought their homes at the peak of the housing cycle.” So GenXers experience tension between wanting to dig themselves out economically and still spend more time with their children, he noted.

Howe said Millennials—those up to about age 30—are a different breed from GenXers when it comes to making employee benefit choices.

“Millennials attach a lot of importance to benefits that come with advice. You’re going to see a lot more ‘opt out’ being preferred.” GenXers, he said, tend to be comfortable making their own independent choices (opt in) without advice.

“A GenXer, when given an excessive number of choices, feels empowered. A Millennial who gets what seems like too many choices thinks ‘you don’t care about me. One of these must be better than the others, and you’re not telling me which.’”

Change, whether evolutionary or revolutionary, is a constant in the employee benefits business. Sometimes it seems that by the time a trend can be identified, it may not be a trend anymore. But the EBRI Forum participants provided a helpful snapshot of where we are now, and where we might be headed.

The author
Thomas A. McCoy, CLU, recently retired as editor-in-chief of Rough Notes magazine.