A recent article in The Economist magazine discussed various theories and principles of “human capital”. As stated in the article, “human capital refers to the abilities and qualities of people that make them productive” and that while knowledge is the most important form of human capital, it is not the only form of human capital. The article went on to note that employers are more willing to pay for knowledge that is firm-specific (e.g., learning proprietary software) than general (e.g., more general programming skills) – but that individuals are willing to acquire general knowledge at their own expense.
What does this have to do with employee benefits?
Employee benefit plans can be seen as another way for employers to contribute to the development of employees’ human capital. Research supports the conclusion that employees who are secure in their ability to obtain health care, to meet other life exigencies, and to finance their needs in retirement will be more productive.
And yet, employers’ ability (or willingness) pay for benefits is becoming increasingly constrained. Health care costs are increasing more quickly than general wages and the financial baggage (such as volatility) associated with defined benefit pensions has placed the traditional pension on the endangered species list. And, even when costs can be managed, as the employment relationship becomes more “transactional” employers are simply not interested in sponsoring programs that have a long “tail” that extends after individuals terminate employment.
These financial and structural factors are forcing employers to narrow the range of benefits provided and to concentrate on benefits provided to current employees today. This trend was documented in a recent report from Willis Towers Watson that quantified shifts in employer spending on different benefit programs from 2001-2015:
- Overall spending on total benefits has increased by 3.5 percent of pay (from 14.8 percent of pay to 18.3 percent of pay);
- This increase masks the fact that spending on health care for current employees has increased by 5.8 percent of pay (from 5.7 percent of pay to 11.5 percent of pay), while spending on defined benefit pensions and post-retirement medical benefits decreased by 3.9 percent of pay (from 5.0 percent of pay to 1.1 percent of pay); and
- Spending on defined contribution plans has increased by 1.6 percent of pay (from 4.1 percent of pay to 5.7 percent of pay).
What does this mean?
Employers are acting in a rational and fiscally prudent way. As the cost of health care for active employees continues to outpace wage growth, employers are focusing resources on the wellbeing of their current workforce. But this places more responsibility on individual employees to identify and finance coverages that provide security after the employment relationship ends.
At the same time, it is becoming increasingly important for employers to develop a strategy for identifying programs that can support employees in addressing these needs, but without an increased financial burden on the employer. Here are some ways that employers can address this issue:
- Building employees’ financial resources by increasing auto/default provisions in 401(k). Over the past decade employers and employees have become increasingly comfortable with automatic enrollment and escalation features in employer-sponsored defined contribution plans. However, many employers are stuck on version 1.0 of these automatic features. It may be time to revisit these features to drive greater levels of employee capital accumulation.
- Building employees’ financial resources with financial management resources. There is increasing interest in financial wellness programs. These programs provide education and planning tools around a range of personal finance challenges, such as debt reduction, asset management and saving for current and future needs.
- Resource and referral programs. There are a wide number of resource and referral programs that can provide useful information and guidance around key topics, such as elder care, child care, and retirement planning. These resources may charge employers for access, but others are sponsored by nonprofit organizations.
- Voluntary benefits. Voluntary benefits have been a longstanding way for employers to supplement their traditional benefit offerings (e.g., supplemental life insurance, vision coverage, and supplemental LTD). In recent years, both the depth and breadth of these coverage’s has expanded, with popular offerings ranging from critical illness coverage (to supplement high deductible plans) to programs as diverse as identity theft protection, pet insurance and student loan repayment programs.
Doing More with Less
Employers need to be smart and strategic in finding new approaches to develop employees’ human capital. This includes determining employees’ most critical needs and focusing on those needs, developing a strategic approach to implementing and communicating these programs, finding the right providers, and addressing the administrative and legal issues that are sure to arise. Although this may seem like a lot of effort, it is an effort that must be undertaken if employers are going to find new ways to do more with less in developing human capital of their workforce.