The Voluntary Benefits Train and Defined Contribution: Why So Many Employers are Offering Voluntary

By Hilary Whitaker

If you haven’t heard the buzz yet, voluntary benefits are taking the marketplace by storm.  With health care reform and the seemingly impossible task of keeping health care costs down, HR administrators are turning to voluntary benefits for a solution.  According to a recent Eastbridge survey, 14 percent of respondents said they were thinking about adding a new voluntary benefit, while 17 percent are thinking about moving an existing employer sponsored benefit to voluntary.[1]

With four generations currently in the workforce, employee choice has become increasingly important.  Being able to offer a diverse selection of benefits and allowing employees to customize their coverage offers value in both retaining and recruiting talent.  However, from an employer standpoint, catering to the assorted needs of these different generations can feel like an overwhelming task.  This is where adopting an entirely different benefits strategy can be beneficial.  Defined contribution is that new strategy, although it is closely related to what we used to call cafeteria plans.

A defined contribution strategy consists of allotting an amount of money to employees for benefit purchase.  This allows employees to make meaningful benefit decisions relevant to their individual needs.  It permits them to forego benefits that are not important to them, while purchasing others that are: a choice not permitted by traditional employer-sponsored plans. Additionally, it assists employers in controlling costs because rather than tying employee contributions to a percentage of benefits, under defined contribution employers tie increases to the dollar amount they provide employees.

So how do voluntary benefits play such a crucial role in switching to a defined contribution plan strategy? It’s as simple as this: all benefits being offered can become voluntary.  Here’s an example of how a defined contribution strategy could work:

ABC Company has a traditionally comprehensive benefit plan package.  They pay 80% of the cost for their health plan, and 100% of the cost for STD, LTD and $50,000 in term life insurance.  This equates to $10,000 per employee per year.

ABC Company switches to a defined contribution plan.  They give each employee $10,000 (notice the same amount) per year to purchase benefits according to their individual needs.  Their purchase options include:

  • A number of medical plans
  • A number of dental plans
  • Vision plan
  • Term life insurance
  • STD
  • LTD
  • Critical Illness w/ Cancer insurance
  • Accident insurance
  • Pet insurance

ABC company still offers a competitive benefits plan, but it now offers a number of different coverage options (including multiple options for medical and dental plans) to the meet the needs of its employees.  And it no longer is hamstrung by increases to the medical plan.  While plans like these are in their infancy in Vermont for employers, Vermont Health Connect already exists an example of a marketplace for multiple medical and dental options.

Under defined contribution, not only do employees have the employer money to make benefit purchases with, they can also make purchases through payroll deduction for additional coverage.  When considering that Nearly two-thirds (66%) of Baby Boomers and 56% of Millenials named health care/ medical benefits as very important for determining job satisfaction[2], it is easy to understand why defined contribution strategies are emerging in the marketplace at a rapid pace.