Over the last decade, escalating health care costs, historically low interest rates and an aging workforce have made employee benefits much more expensive, while historically low productivity growth has kept compensation budgets lean.

Meanwhile, employees are dealing with their own financial stress, with many American households struggling to make ends meet. Whether it’s the baby boomers behind on retirement savings or the millennials trying to keep up with student loan debts, sluggish wage growth is making their financial burdens heavier. Many employees are worried about paying today’s bills and about financing tomorrow’s retirement.

Delivering a benefit package that employees value has never been more important, as employers struggle to retain key employees at a time when compensation budgets remain flat. Uncertainties about their own prospects as well as the broader economic landscape have made financial security more valuable to employees and their families. Failing to address employees’ concerns could become a drag on employee engagement and productivity, ultimately hurting employers’ bottom line.

What changes have employers made to their benefit programs to adjust to these economic realities, and how well do these changes align with employee preferences and needs? This analysis examines trends in employer costs for benefit plans since 2001 by examining a proprietary database of retirement and health care programs at over 500 employers with at least 200 employees. The analysis also addresses employees’ concerns, expectations and desires around benefits, and suggests solutions that can help employers deliver benefits more closely aligned to their employees’ priorities.

Estimating the cost of employer benefits

This analysis focuses on employer costs as a percentage of average pay for defined benefit (DB),1 defined contribution (DC),2 postretirement medical (PRM) and active health care plans from 2001 to 2015. The cost of retirement benefits is based on the Willis Towers Watson Benefits Data Source (BDS) database, a comprehensive source of information about employee benefits, including retirement, health and welfare, paid time off, lifestyle and flexible benefits. The analysis defines total retirement benefits as the combined value of DB, DC and PRM plans.

To determine how much employers spend as a percentage of average pay, the analysis applies key economic assumptions to a hypothetical workforce, so we can compare spending on the same basis across all employers. DB and retiree medical spend represents the normal cost (value of benefits accrued during the year), and benefits are valued using the projected unit credit (service prorate) methodology. DC values reflect assumptions of participation and contribution rates (this study considers only employer contributions). To ensure that employer spend as a percentage of pay is comparable across all years, all values were converted to a 2015 scale.

Active health care costs as a percentage of pay are based on Willis Towers Watson’s Financial Benchmarks Surveys from 2001 to 2015. This annual survey collects detailed health care plan and cost information along with individual enrollment choices for over 1,000 employers. Health care costs include employer contributions to premiums for medical and pharmacy plans, plus any account contributions and rewards/surcharges paid by the plan. Health care costs are adjusted by age, family size and geography to normalize per-employee annual costs across the database. Costs do not include the employee’s portion of premiums or any point-of-care costs.

All values in this analysis are based on benefit programs offered to newly hired salaried workers. To control for changes in the sample composition over time, we weighted the observations by the size of the employer’s workforce to arrive at weighted averages.

These costs may not reflect the real-world dollar amounts spent on benefits and compensation. For example, retirement and retiree medical benefits can vary widely across a workforce because of changes to benefit plans over time, so some older, grandfathered cohorts might receive a benefit package no longer offered to newly hired employees. Likewise, some sponsors of DB plans are paying more to make up for earlier funding shortfalls, and such legacy costs are not included here.

The value of this approach is that it provides a window into where employee benefits are heading, which for many organizations is in a very different direction from where they are today.

Employer trends in benefit costs

Between 2001 and 2015, active health care costs doubled, rising from 5.7% to 11.5% of pay (Figure 1). The biggest jump was between 2001 and 2008, when average health care costs climbed by 3.4 percentage points and were trending upward by nearly 10% a year. Despite the more recent slowdown in health care cost trends to about 5% per year, health care costs still eclipsed pay growth between 2008 and 2015, with the ratio of health costs to pay increasing by 2.4 percentage points.3 While this analysis focuses only on employer cost, employees’ share of premiums and point-of-care costs has also risen significantly over the analysis period, so health cost burdens have gotten heavier for both employers and employees.

Figure 1. Total employer benefit costs as percentage of pay, weighted by employer size, 2001 – 2015

Figure 1. Total employer benefit costs as percentage of pay, weighted by employer size, 2001 – 2015
Click to enlarge.

Source: Willis Towers Watson Benefits Data Source
Notes: n = 1,232 for 2001, n = 1,422 for 2008 and n = 642 for 2015.

Conversely, total retirement costs declined by 25% between 2001 and 2015, from 9.1% to 6.8% of pay. Over that period, many employers shifted away from DB plans as their primary retirement vehicle, typically replacing them with an enhancement to the existing DC plan. In fact, DC benefits increased by 1.6 percentage points between 2001 and 2015, which wasn’t enough to replace the 2.9 percentage-point loss in DB plan benefits. Eliminating 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.

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.

These trends reflect a seismic shift in the allocation of benefit dollars (Figure 2). 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.

Figure 2. Share of cost between active health and retirement plans, weighted by employer size, 2001 – 2015

Figure 2. Share of cost between active health and retirement plans, weighted by employer size, 2001 – 2015

Source: Willis Towers Watson Benefits Data Source
Notes: n = 1,232 for 2001, n = 1,422 for 2008 and n = 642 for 2015.

As noted above, much of the reduction in retirement costs can be attributed to the widespread shift from offering a traditional DB plan with a supplemental DC plan to offering only a DC plan. The transition typically involved freezing or closing the DB plan.4 Between 2001 and 2015, the percentage of organizations offering a traditional DB plan to new hires dropped from 45% to 7%. 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.

Some employers decided to continue providing a pension by converting their traditional DB plan to a hybrid DB plan.5 Historically, traditional DB plans have tended to deliver richer benefits than hybrid plans, especially to longer-tenured workers. In a hybrid pension, the employer still bears the financial risk of managing a pension, whereas in a DC-only environment, all investment and longevity risks rest with the worker. Among companies that sponsored a DB pension for new hires in 2015, 71% offered a hybrid pension, up from 24% in 2001.

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 (Figure 3). 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.

Figure 3. Employer retirement benefit costs as percentage of pay by plan type for 2015 (weighted by employer size)

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Figure 3. Employer retirement benefit costs as percentage of pay by plan type for 2015 (weighted by employer size)

Source: Willis Towers Watson Benefits Data Source
Notes: n = 47 for traditional DB + DC, n = 107 for hybrid DB + DC and n = 488 for DC only.

Overall benefit generosity also varies by industry (Figure 4). Active health care costs are substantial across all sectors, ranging from 10.4% of pay in the Retail sector to 12.7% of pay in the Oil, Gas and Electric (OG&E) sector.

Figure 4. Total employer benefit costs as a percentage of pay by industry for 2015 (weighted by employer size)

Figure 4. Total employer benefit costs as a percentage of pay by industry for 2015 (weighted by employer size)

Source: Willis Towers Watson Benefits Data Source

Disparities among industries are more pronounced for retirement benefits. For example, total retirement benefits averaged 12% of pay in the OG&E sector compared with roughly 5.5% of pay in the Health Care, High-Tech and Retail industries. Utility, energy and natural resource companies (which make up OG&E) have some of the highest pension sponsorship rates among sectors.6 Utilities are typically heavily unionized and generally prefer to maintain a consistent retirement structure for both union and nonunion workers. Moreover, many OG&E jobs are physically demanding, and DB plans facilitate retirement at an appropriate time.

Overall benefit costs as a percentage of pay were also higher than average in the Finance and Manufacturing sectors. The Finance sector includes insurance organizations, which have high DB sponsorship rates, although banks and other finance employers have been less likely to offer DB plans to new hires since the 2008 financial crisis. While many manufacturers shifted from DB to DC plans over the last decade, most of them beefed up their DC contributions after closing or freezing the DB plan and thus provide relatively high-value DC benefits to newly hired workers today.

The High-Tech and Retail sectors have had low DB sponsorship rates historically, as DC plans are probably a better fit for their more mobile workforces (relatively high turnover makes portability more important). DC values have remained comparatively low for this group as there typically has not been a pension loss to prompt employers to enhance DC benefits.

Employee perspectives of changing benefits

How does the reallocation of retirement dollars to active health benefits align with employee preferences? For over a decade, Willis Towers Watson’s Global Benefits Attitudes Study (GBAS) has surveyed employees about their attitudes, preferences and behaviors around their benefits, health and finances. The 2015/2016 survey results presented here are based on 4,721 full-time U.S. employees. The survey results 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. Forty-one percent of respondents say they often worry about their current finances, and about one in five reports that their current financial situation is negatively affecting their lives (Figure 5). Roughly half say they often worry about their financial future, rising to 55% for millennials. 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.

Figure 5. Employees’ financial concerns and reliance on employer retirement programs

Figure 5. Employees’ financial concerns and reliance on employer retirement programs
Click to enlarge.

Source: Willis Towers Watson’s 2015/2016 Global Benefits Attitudes Survey
Notes: Baby boomers were born between 1946 and 1964; Gen Xers were born between 1965 and 1980; and Gen Y – or millennials – were born between 1981 and 2000.

Why should this matter to employers? The simple fact is that employees bring their anxieties and distractions to work each day, where their worries impair performance, trigger lost days, raise stress levels and ultimately drag down productivity.

Employees’ financial concerns can also create longer-term problems for employers. 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. In fact, 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 (Figure 6). What’s more, nearly half of financially struggling older employees feel stuck and would retire if they could afford to do so. It’s clear — financial issues are impacting employee performance in a big way and the toll is ultimately a drag on business results.

Figure 6. Financial worries and working longer

Figure 6. Financial worries and working longer

Source: Willis Towers Watson’s 2015/2016 Global Benefits Attitudes Survey
Notes: To help understand the variety of financial issues facing employees, respondents were segmented into four categories: (1) unworried; (2) future worries (those worried about being able to afford retirement); (3) current worries (those worried about their finances in the short-term but confident of being able to afford retirement); and (4) struggling (those concerned about both short- and long-term finances).

Employees increasingly look to their employers for greater support even as the value of their benefit programs is eroding. In fact, increasing concern about long-term financial security coincides with greater reliance on employer retirement plans. In 2010, fewer than six out of 10 employees did most of their saving for retirement through their employer plan (Figure 7). Today, nearly four in five employees say their company’s retirement program is the primary way they save for retirement.

Figure 7. My retirement plan is the primary way I save for retirement, 2010 – 2015

Figure 7. My retirement plan is the primary way I save for retirement, 2010 – 2015

Source: Willis Towers Watson’s 2015/2016 Global Benefits Attitudes Survey

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 (Figure 8). The desire for retirement guarantees has been rising steadily since the 2008 financial crisis — up 17 percentage points since 2009.

Figure 8. Employees willing to pay for superior retirement benefits but not health care costs

Figure 8. Employees willing to pay for superior retirement benefits but not health care costs
Click to enlarge.

Source: Willis Towers Watson’s 2015/2016 Global Benefits Attitudes Survey

Conversely, only around one-third of respondents would accept a smaller paycheck in exchange for more generous health benefits or lower, more predictable costs when using health care services — in the case of the latter, the trend is down 10 percentage points since 2009.

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.7 But many employees appear to have reached the limit of how much they are willing or able to pay for health care benefits, which raises the question: Have we gone too far in cutting retirement support at a time when escalating health care costs — among other factors — are making it difficult to save more?

Employer considerations

Rising health care costs have been an ongoing challenge for employers over the last several decades. As health care cost inflation has outpaced inflation in other goods and services — and, more importantly, outpaced productivity growth — employers have had to make difficult decisions about the structure of their rewards. As this analysis shows, employers have typically spent more on health care benefits and less on retirement benefits and pay increases.

These changes have played out against a backdrop of widespread financial uncertainty in the wake of the 2008 financial crisis and recession. Now that the shift from DB to DC is well established, employers might want to reevaluate their allocations of benefit dollars to better respond to employees’ current needs and concerns. This could consist of more tax-efficient saving mechanisms, such as broader use of health savings accounts, as well as other health plan designs that encourage wiser spending on health care services. Whatever the solution, employers need to balance their costs with the long-term returns on providing benefit packages that will be highly valued by their workforce, as well as attract desirable employees and encourage timely retirement. The benefits employees value will likely change along with evolving economic and demographic conditions, as well as their personal circumstances.

Knowing what employees want is an important step in evaluating the benefit spend. When employees were asked how they would allocate employer dollars on benefits, much of the focus was on preserving core benefit offerings (Figure 9). While it’s commonly understood that health and retirement benefits are highly valued by older workers, Gen Y — the millennials — also appreciate these benefits, especially their retirement programs. In fact, millennials (59%) are almost as willing to pay more out of their paycheck for a more secure retirement benefit as baby boomers (66%) or Gen Xers (63%).

Beyond core benefits, there is a strong interest in benefits that provide protections for employees’ wealth/income and those that offer medical protections, such as critical illness and accident insurance. Employees of all generations would allocate about one-quarter of their benefit dollars to these benefits. Finally, lifestyle benefits — like those offered through well-being and discount-buying programs — are gaining appeal, especially to millennials.

Figure 9. How employees would allocate a benefit budget

Figure 9. How employees would allocate a benefit budget
Click to enlarge.

Source: Willis Towers Watson’s 2015/2016 Global Benefits Attitudes Survey

Benefits should support a variety of needs and unlock greater cost efficiencies. Employers could deliver greater value by more closely matching their rewards to employees’ priorities and concerns. One option would be offering a broader assortment of benefits that includes supplemental medical (e.g., critical illness and accident insurance) and other voluntary benefits that provide income security and protections, and introducing more flexibility and convenience.

While giving employees more choices and flexibility could improve their experience and ensure that they receive the benefits they value most, many employees struggle to make these decisions on their own. Establishing guardrails through decision support tools that are engaging and easy to access, and that provide real-time support can help employees navigate complexities and land on reasonable options that work for them.

Many employees are dealing with a complex array of circumstances involving their health or personal finances that requires additional support. Well-being programs can go a long way to helping employees who are struggling in these areas. While low engagement has been an ongoing challenge, employers are delivering greater value by leveraging emerging technologies and incorporating employee feedback into their decisions about which well-being programs to offer. But gaining a greater understanding of employees’ issues and taking steps to meet them where they are remain excellent first steps in building trust — even around highly personal issues — and in aligning benefit solutions more closely with employees’ priorities.

Forging stronger connections in this way could boost employee engagement with employers’ significant investments in workforce well-being, which in turn should foster greater employee loyalty and ultimately improve job performance.


Endnotes

1. In a DB retirement plan, the employer promises a specified payment in retirement that is determined by a formula typically based on the employee's earnings history, tenure and age. These plans can provide a predictable income stream in retirement as an annuity must be offered even if the formula is lump sum-based.

2. In a DC plan, such as a 401(k) or 403(b), employees elect to defer compensation into an account that they typically manage, including choosing investment options. Most employers contribute to the account as well. These plans generally allow employees to take their account balance with them when they leave the organization, or transfer it to another employer-sponsored plan or an individual retirement account.

4. When a sponsor freezes a DB plan, some or all benefits stop accruing for some or all participants. For example, the plan might stop accruing benefits linked to service but continue those linked to pay, or stop accruals for all participants younger than 50 with less than 15 years of service. After a sponsor closes a pension plan, benefits continue to accrue for participants but no one else can join the plan.

5. Hybrid DB plans define the retirement benefit as an account balance rather than an annuity. Hybrid benefits typically accrue more evenly across a worker’s career (although designs can increase benefit accruals by age, service or a combination of the two). When hybrid plan participants leave their employer, they usually take their account balance with them (either immediately or more typically some years later). As DB plans, hybrid plans must offer an annuity as the primary distribution option.

6. See “A continuing shift in retirement offerings in the Fortune 500,” Willis Towers Watson Insider, February 2016.

7. See “2015/2016 Global Benefits Attitudes Survey,” Willis Towers Watson.