Employees’ Choice

By Carolyn Hirschman Feb 1, 2006
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HR Magazine, February 2006 Voluntary benefits cost employers virtually nothing while they help workers round out their benefits selections.

They don’t make the “A list” of company-sponsored benefits, but they’re getting more and more attention. They’re called voluntary benefits, and, although they’re not on a par with health coverage or retirement programs, they’re increasingly being added to employers’ menus of employee benefits.

Burgeoning sales figures and projections show that voluntary-benefits products, which employers make available and employees pay for, are seen as a cost-effective tactic for enriching a company’s offerings for employees. And the time is right to provide employees more benefits options because many workers are having to shoulder more of their health coverage costs and may want to supplement their employer-paid benefits.

In the 2004 MetLife Study of Employee Benefits Trends, the New York-based insurance and financial services company found that one-fifth of 1,528 HR and benefits executives who responded said their most important benefits strategy currently is to provide more voluntary benefits.

As such benefits grow more popular, HR professionals are having to choose the types of coverage best-suited for their workforce, oversee implementation of the products and exercise any applicable fiduciary responsibilities.

The Starting Point

Voluntary benefits, also called worksite benefits, have been around for decades. They range from niche products such as pet insurance and identity-theft protection to coverage categories with wider appeal, such as automobile and homeowners insurance. They can also include products such as vision and dental care, legal services, and college savings plans.

Employees’ costs are often based on discounted group rates negotiated by the employer. The employer’s expenses are typically limited to administrative costs, such as those for payroll deduction.

Some voluntary benefits are portable—meaning the employee can continue the coverage after leaving the company. › Although some insurance benefits are sold as group policies, most are individual policies.

Sixty-four percent of employers—large organizations more often than small ones—offer at least one voluntary benefit, according to Eastbridge Consulting Group Inc., a financial services consulting firm based in Avon, Conn. Sales of voluntary-benefits products have more than doubled since 1997, and the trend will continue, says Bonnie Brazzell, vice president of Eastbridge. “We expect it to grow at a high single-digit or low double-digit rate annually for the foreseeable future,” she says.

Garry Sullivan, senior vice president and national voluntary benefits practice leader at Aon Consulting in Chicago, says, “There’s no industry that’s not a candidate” for voluntary benefits.

“The most popular benefits are still basic benefits—voluntary life and voluntary disability,” which together accounted for nearly half of the $4.2 billion spent on new voluntary-product premiums in 2004, says Brazzell.

The fastest-growing category of voluntary benefits, according to experts, consists of specialized medical coverage. Some types of coverage in that category are being expanded. For example, critical-illness insurance that once covered only cancer has been broadened in many instances to include heart attacks, major organ transplants, and other specific medical conditions or procedures. Typically, a lump-sum benefit of $10,000 to $50,000 is paid after a covered event occurs, and the money can be spent on medical or nonmedical needs.

The Society for Human Resource Management’s 2005 Benefits Survey Report shows that 47 percent of employers offer supplemental health insurance, up from 42 percent in 2004, and 30 percent offer hospital-indemnity insurance, up from 26 percent. Critical-illness insurance has risen every year since 2001, when it was offered by 26 percent of employers; in 2005 it was on the menu at 38 percent of the companies surveyed.

A Further Incentive

Voluntary benefits not only can round out a company’s total benefits package and offer employees discounted coverage for their specific needs, advocates say, but also can aid in recruitment and retention.

Karl Weiss, PHR, manager of associate benefits at clothing retailer Eddie Bauer Inc., says, “We look at [voluntary benefits] as part of our total compensation package. It enhances the attraction for someone coming on board.”

About 3,500 of the 9,000 employees at Eddie Bauer, based in Redmond, Wash., are eligible for benefits, and they can also choose from a menu of specialized insurance products covering, among other things, cancer, accidents, long-term care and personal recovery. In addition, they can sign up for group auto and homeowners coverage.

Where HR’s Role Begins

The first step in setting up a voluntary benefits program is deciding which products to include. Some employers offer a broad menu, while others narrow the choices to those they believe best suit their workers’ needs and preferences, Sullivan says.

HR managers can survey employees to assess their preferences or may simply examine the company’s workforce demographics. Older workers may prefer long-term-care insurance, for example, while younger ones might favor accident insurance.

HR should also look at its organization’s current benefits package to see what makes sense. In some instances, employers want to give employees access to benefits that the employer could not otherwise afford; in other instances, they may want to offer options that complement existing employer-paid benefits. For example, employees often “buy up” to higher levels of life and disability coverage than their employers provide. And a company with a high-deductible health plan might offer critical-illness and hospital-indemnity insurance—such as insurance that pays a set amount for each day in the hospital—so employees can obtain coverage for medical services not covered by their regular health plan.

Don’t offer too many products at once, however, because employees may feel overwhelmed and not choose anything, says Lance Osborne, vice president of field force development for Aflac, a provider of voluntary-benefits products based in Columbus, Ga.

When choosing a voluntary-benefits provider, consultants suggest, look for vendors that have experience with voluntary benefits, that have top financial ratings from A.M. Best or similar insurance rating agencies, and that offer excellent customer service and administration. The cheapest product isn’t necessarily the best, they note.

Premium discounts for employees who sign up for voluntary insurance benefits vary by product line, and some carriers require minimum participation rates for guaranteed-issue products such as life and disability insurance. A typical requirement is 20 percent to 25 percent of eligible workers, Brazzell says. Aflac, on the other hand, requires only three employees to enroll, regardless of employer size, to qualify the company for discounted rates.

Weiss of Eddie Bauer says that after researching the voluntary-benefits market and surveying employees for their preferences, he went shopping for products and vendors. The process involved reading, talking to HR peers and “checking references very thoroughly,” he says.

Giselle Sampson, employee benefits manager for REI Inc., a Sumner, Wash.-based company that sells outdoor gear and clothing, says she had a consultant help identify the best voluntary-benefits providers. She also uses a novel tactic: Since REI was named to Fortune magazine’s list of the top 100 companies to work for, she calls other companies on the list and asks, “Who do you use?”

REI offers its 7,500 employees vision care as well as several types of insurance, including long-term care, life, accidental death and disability, and long-term disability.

Collaborating with Vendors

After deciding on the types of voluntary benefits to offer and selecting vendors, HR can usually let vendors exercise their soup-to-nuts follow-up capabilities in marketing, communication and enrollment. Typically, vendors handle on-site meetings, marketing materials, customer service and claims processing. HR may be more or less involved in each of those steps as it sees fit.

“The HR role is to quarterback the whole process,” Sullivan says. “HR needs to have a handle on what’s being done and who’s doing it.”

Generally, HR sets up payroll deductions, facilitates communication with employees, monitors providers and integrates providers’ information with the employer’s intranet.

“It’s a partnership,” says Weiss. “We have to work with [our vendors] closely to see what fits with our culture.”

Education—meeting with employees and providing information through printed materials, web sites and replies to toll-free phone calls—is paramount for the success of voluntary benefits, providers say. “The better you understand your need and the product, the more likely [you] will buy it,” says Todd Katz, vice president of institutional business at MetLife.

Aflac’s Osborne adds, “Our best success in education is face-to-face education where [employees] can ask us questions. We like to do both group and individual meetings on-site.” Since many buying decisions are made at home, it’s important to mail or send materials there, he says.

Checking the Results

Participation rates can indicate to HR the appeal of the voluntary benefits it offers to employees, but be aware that “normal” rates vary by product, experts say. Life insurance often garners 35 percent to 50 percent participation, Katz says, while long-term-care and critical-illness insurance get less than 10 percent.

“The best way to measure is not by your first open enrollment” but by whether participation steadily increases year by year, Osborne says. If people drop coverage, Brazzell says, that’s a red flag.

In addition, HR can survey employees about their satisfaction and benchmark their offerings against competitors’, Katz adds.

Sometimes, though, no news is good news. Says Weiss: “If we don’t hear from people, we assume it’s working.”

A Matter of Responsibility

A significant issue arising for benefits specialists offering voluntary products is whether, in doing so, the employer incurs fiduciary responsibility. It depends on the extent of the company’s participation in offering those benefits, attorneys say.

Cynthia Van Bogaert of Boardman Law Firm in Madison, Wis., says, “There’s a misconception that just because it’s employee-pay-all, that’s a fringe benefit and not subject to ERISA”—the Employee Retirement Income Security Act, which governs benefits plans. The test, she explains, is not who pays for the benefits but who controls them. It all depends on the degree of “employer involvement.”

If an employer plays a strong role in establishing and maintaining a benefits plan, then it’s an ERISA plan, Van Bogaert says. The employer is a fiduciary and must follow the law’s reporting, disclosure and other requirements.

If the employer’s role is strictly “ministerial”—limited to administrative tasks such as payroll deduction—then the benefits plan is probably not an ERISA plan, and the employer is not a fiduciary, says Lisa Van Fleet, who chairs the employee benefits practice at Bryan Cave LLP, a law firm in St. Louis. To avoid creating fiduciary responsibilities with voluntary benefits, the benefits must be strictly voluntary and the employer cannot contribute to them, she adds.

Avoiding fiduciary responsibility may not be an easy task, Van Fleet says. Van Bogaert agrees: “It’s very easy in a voluntary plan to cross the line into an ERISA plan.”

A voluntary-benefits program is most likely an ERISA plan, Van Bogaert adds, if an employer promotes the program, distributes benefits information in its name or allows payment through a Section 125 plan (a plan that permits pretax payroll deductions for employees’ costs).

“It’s very attractive if you can structure a program so it’s not employer-sponsored,” Van Fleet says, but “you have to walk pretty carefully and think about it beforehand.”

Carolyn Hirschman is a business writer in Rockville, Md., who specializes in HR and benefits issues.

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