Benefit Costs Soar, But Retirement Costs Slip
A new analysis finds that the costs of providing retirement benefits declined by 25% between 2001 and 2015, but perhaps not for the reason(s) you think.
Between 2001 and 2015, overall employer benefit costs relative to pay rose by 3.5 percentage points. Pay increases have not kept pace with higher benefit costs, despite reduced spending on retirement benefits, according to the report
by Willis Towers Watson.
The report notes that those costs declined from 9.1% to 6.8% of pay, as many employers shifted away from defined benefit plans as their primary retirement vehicle, typically replacing them with an enhancement to the existing defined contribution plan. In fact, the report notes that DC benefits increased by 1.6 percentage points between 2001 and 2015, although that wasn’t enough to replace the 2.9 percentage-point loss in DB plan benefits. Eliminating post-retirement medical plans (PRM) for new hires and reducing employer subsidies also played a role in reducing overall retirement cost, as PRM values declined by one percentage point over the analysis period.
The report’s authors say that these trends reflect a seismic shift in the allocation of benefit dollars: in 2001, active health care costs comprised about two-fifths of benefits, while retirement benefits made up the remaining three-fifths. By 2015, the ratio had flipped, with active health care benefits accounting for slightly less than two-thirds of costs and the retirement share dropping to slightly more than one-third.
The transition – shifting from offering a traditional DB plan with a supplemental DC plan to offering only a DC plan — typically involved freezing or closing the DB plan. Indeed, between 2001 and 2015, the percentage of organizations offering a traditional DB plan to new hires dropped from 45% to 7%, and by 2015, 76% of employers sponsored only a DC plan for new hires compared with 41% in 2001. While employers typically contribute more to the DC plan after closing or freezing a DB pension, the higher DC contributions generally do not replace the value of the lost pension, according to the report.
That said, retirement plan costs vary widely among employers. Among those that offer only a DC plan to new hires, the average retirement spend was 6.2% of pay, while among employers that also offer pensions — hybrid or traditional — to new hires, the average retirement cost was 8.9% and 11.2% of pay, respectively. In 2015, the costs of traditional DB plans averaged 6.1% of pay, while hybrid plans averaged 4.6% of pay. Moreover, employers that still offered traditional DB plans were more likely to also offer more generous PRM plans. In 2015, the average PRM value was 1.6% of pay for sponsors of traditional DB plans versus 0.4% among hybrid plan sponsors.
How does the reallocation of retirement dollars to active health benefits align with employee preferences? The report authors note that the 2015/2016 survey results, based on 4,721 full-time U.S. employees, suggest a disconnect between employees’ primary concerns, needs and preferences and the reshuffling of employer dollars.
Both short- and long-term financial concerns are top of mind for employees today: 41% of respondents say they often worry about their current finances, and about one in five report that their current financial situation is negatively affecting their lives. Many Millennials do not expect to receive the same level of retirement benefits enjoyed by older workers, and three-quarters assume that their generation will be worse off than their parents’ generation.
The report’s authors note that employees who are worrying about the future or struggling financially — which include 42% of the typical workforce — are more likely to continue working well past their preferred retirement age (going on to note that 44% of older workers (ages 55+) who are concerned about their future finances and 64% of those who are struggling financially expect to work to age 70 or later).
Health Versus Retirement
The extent of responding employees’ worries about their long-term financial prospects is also reflected in their willingness to forgo some amount of pay for more generous or more secure retirement benefits. Roughly two out of three employees would trade some pay for more generous and guaranteed retirement benefits, but only around one-third of respondents would accept a smaller paycheck in exchange for either more generous health benefits or lower, more predictable costs when using health care services. In the case of the latter alternative, the trend is down 10 percentage points since 2009.
The report notes that employees value their health care benefits just as highly as their retirement benefits, with 65% to 70% saying they are highly satisfied with both programs and about 60% saying these programs meet their needs. On the other hand, many employees appear to have reached the limit of how much they are willing or able to pay for health care benefits, according to the report.