U.S. employers’ cost to provide employee benefits, measured as a percentage of pay, increased 24% between 2001 and 2015, fueled largely by a doubling in healthcare benefit costs, according to a new analysis by Willis Towers Watson, a leading global advisory, broking, and solutions company. The analysis reveals a major shift in how employers allocate benefit dollars and prompts questions as to whether they are delivering the benefits their employees want.
The analysis, Shifts in Benefit Allocations Among U.S. Employers, found the total cost of employer-provided benefits—health care, retirement, and postretirement medical—rose from 14.8% of pay in 2001 to 18.3% of pay in 2015, a jump of 24%. During this period, healthcare costs for active employees more than doubled, rising from 5.7% to 11.5% of pay.
Conversely, total retirement benefits, which include defined benefit (DB), defined contribution (DC), and postretirement medical plans (PRM), declined by 25% between 2001 and 2015, from 9.1% to 6.8% of pay. The analysis defines total retirement benefits as the combined value of DB, DC, and PRM plans. Other benefits such as paid time off, lifestyle, and flexible benefits are not included in the analysis.
“The rising cost of employee benefits remains a challenge as employers seek to get the most employee value from their pay and benefit programs,” said John Bremen, Managing Director, Human Capital and Benefits, Willis Towers Watson—in a press release. “Beyond the overall increase, there has been a seismic shift that can be characterized as a tale of two benefit programs. Health care benefits are eating up a larger portion of dollars while the amount spent on retirement programs is on the decline. This reallocation has major implications for employers and employees alike.”
Indeed, in 2001, healthcare costs for active employees comprised about two-fifths (42%) of benefits, while retirement benefits made up the remaining three-fifths (58%). By 2015, the ratio had flipped, with healthcare benefits accounting for just under two-thirds of costs (64%) and the retirement share falling to slightly more than one-third (37%).
The analysis noted much of the reduction in retirement costs during this 15-year period can be attributed to the widespread shift by employers from offering a traditional DB plan as their primary retirement vehicle, to typically replacing them with enhancements to their DC plan. While DC plan costs increased by 1.6 percentage points between 2001 and 2015, this wasn’t enough to offset the 2.9 percentage point decline in DB benefit costs.
The analysis also suggests the reallocation of retirement dollars to healthcare benefits might not align with employee preferences and needs. While Willis Towers Watson’s Global Benefits Attitudes Survey shows that employees value their healthcare benefits just as highly as their retirement benefits, many employees appear to have reached the limit of how much they are willing or able to pay for healthcare benefits. Additionally, many employees are worried about their current and future financial situations, and fear they won’t have saved enough for retirement and will have to work past normal retirement age.
“With the shift from DB to DC plans well established, employers may want to reevaluate the allocation of benefit dollars to better respond to employees’ needs and concerns,” said Alexa Nerdrum, Senior Retirement Consultant at Willis Towers Watson. “This could consist of more tax-efficient saving mechanisms, such as the broader use of health savings accounts, as well as wiser spending on health care. While the solution for each organization will be unique, employers need to balance cost with the long-term returns on providing benefit packages that will be highly valued by their workers.”
About the Analysis
The Willis Towers Watson analysis, Shifts in Benefit Allocations Among U.S. Employers, examined trends in employer costs for benefit plans since 2001 by examining a proprietary database of retirement and healthcare programs from over 500 medium and large U.S. employers.