Managing or Reducing Costs of an Employee Benefit Plan

Here in Alberta, there is a huge change in trends underway when it comes to Employee Benefit Plans.

For the past 10 years or more, we have seen unprecedented growth in Alberta because of the oil boom.  In the Employee Benefits industry, the priorities for employers when it comes to their plans have been:

  1. Offering a comprehensive benefits package that attracts and retains employees and
  2. Enhancing existing benefit plans

For most employers, managing the costs associated with setting up and/or maintaining their plan was not a priority because there was lots of work, lots of revenue and therefore plenty of profit available to invest in the plan. The corporate focus was on revenues and growth and often where there were cost savings on the benefit program, employers used those savings to enhance plans rather than cut costs.

Today, it’s a different world.  Lower oil prices have impacted many industries and in the HR world, it’s meant a large number of layoffs.

In the employee benefit world, we have seen a significant change in thinking over the past few months, as the employers’ focus shifts from growth to managing and reducing costs.  In 9 out of 10 conversations, we are hearing about the pressures to reduce costs in this tougher economic environment.

Here are four ways to manage and reduce costs on your employee benefit plan:

Go to Market

It’s a pretty competitive marketplace today.  Consolidation in the insurance industry means big providers like Sun Life, Manulife and Great-West Life, who control over 70% of the market share, can’t grow through acquisition and so pricing has become more competitive.

As benefit brokers we know that going to market can save you a lot of money in the short term.  Unfortunately, you must keep in mind, short term reductions in premium are not likely to be sustainable over the longer term.  The insurance companies are ‘buying business’ today with low quotes and even long guarantees but in most cases, it is likely that prices will increase in the future.

In many conversations with clients, they want the short term savings to help with the cost pressures of low oil prices.

Reduce Benefits

Although this will not be popular among employees, reducing benefits may be an economic necessity for employers.  Periods of economic slow-down are actually good times for employers to look at reducing benefits because employees would rather take a cut to their benefits than risk losing their job. There are several ways to refine a plan that will reduce its overall cost while limiting the impact on employees. These include:

    1. Remove benefits like orthodontics and vision care which are expensive but do not appeal to all employees
    2. Lower the maximums for items like massage, chiropractic etc.
    3. Lower the percentage of coverage for drugs or dental (for example 80% instead of 100%)
    4. Introduce Health Spending Accounts to replace benefits; because HSAs are dollar capped it makes it easier to manage costs.

Cost Share Premiums

Employers who are paying more than 50% of the cost of the premiums may want to look at instituting a sharing of premiums.  For example, because of the recent strong growth periods, some employers have chosen to bear 100% of the cost of the employee benefit plans.  In tough times, employers may have to look at a cost share (eg. 50%/50% which is quite common for a lot of organizations). Again this may not be a popular strategy for employees but, given the current economic climate, the timing might be right for employers.

Review the Financial Model

Employers with more than 100 employees might want to look at an alternate financial model to their Employee Benefit Plan called Administrative Services Only (ASO).  ASO does not always reduce costs so careful evaluation is important. Employers may want to seek the help of an Employee Benefit Consultant or broker before making a final decision to switch.

With over 75% of the Canadian workforce having access to benefits, either through their own employer or through the employer of a spouse, the costs associated with having a plan have become an accepted part of the price of doing business. However, just like any other business expense, the ongoing cost of its benefit plan impacts an organization’s bottom line. In today’s tough times, finding ways to reduce those costs, without significantly impacting employee morale, makes sound business sense.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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