The migration of employers from defined benefit to defined contribution programs has been the subject of a lot of conversation in the employee benefits industry for the past seven or eight years. The Affordable Care Act has galvanized the industry’s move forward, and the availability of highly advanced technology is likely to accelerate this transition. It’s time to start planning for it now.
What’s taking place in health and welfare benefit plans mirrors the shift in employee retirement programs that began 30 years ago, from DB employer-managed pension plans to DC employee-directed 401(k)s. In many ways that movement laid the groundwork for this one. Both are built on this notion of consumerism, in which individuals have more choice but also shoulder more of the responsibility for funding and taking care of their own benefits.
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The shift from pension plans to 401(k)s — which are now offered by 94% of companies — has been sweeping, but it’s taken nearly 30 years to get to this point. In contrast, I think a sweeping, technology-powered shift of the remainder of the health and welfare benefits package is going to happen in about two or three years.
The stage has already been set. Employers have been trying to rein in rising health care costs for quite a few years now, and employees have become accustomed to high-deductible health plans where they can opt to share more of the cost burden of routine care. The notion of applying a DC approach to the whole benefits package was broached a couple of years ago and the idea has gained currency as very attractive model for employers to help them cap their costs.
A new industry is born
Against this backdrop, along came the ACA mandate to provide health care coverage for everyone, suddenly making this an urgent, universal problem to solve. A new industry is already springing up to solve it: private exchanges.
There is a lot of interest in private exchanges in the employer community, as well as in the insurance broker, advisory and carrier communities. A host of technology vendors are rushing to set up these exchanges, including insurance companies, Fortune 500 companies and a whole bunch of startups.
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Like 401(k)s, employee benefits in general, and health care in particular, can be hard to understand, but this time around employers feel much more empowered to shift the burden of decision-making to employees because these exchanges will provide easy access to user-friendly decision support tools.
It’s an attractive proposition for employers, because besides capping costs, they can also relieve themselves of some of the work of benefits administration as selection, purchase, life changes and billing transactions are all automated through the exchange.
Employees, of course, need to prepare themselves for evaluating all these new options, but for the employee these exchanges should provide what is by now a very familiar, easy online shopping experience.
The back end of the exchange will be far more complicated, but critical to the success of the exchange, and insurance carriers, brokers and employers need to prepare to assess their needs and select the best exchange technology for their purposes.
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Insurance carriers need to prepare for their products to sit on the virtual shelves of these marketplaces right next to competing products. They need to become more astute about educating consumers on the advantages of their products, and they have to be smarter about how their products are marketed and sold online.
Insurance brokers need to understand how to advise clients how to best transition to DC scenarios, how they should design plans, and which private exchange or marketplace model is best suited for each client. They’ll need to understand how DC impacts employer costs, and whether or not it’s going to work within each client’s culture.
Employers need to make sure that DC plans are managed appropriately so as to truly provide financial certainty around future costs.
They also need to understand the impact on employees. If the company has been very paternalistic in the past and is now saying, "Here’s a bunch of money, you go spend it," they’ll have to put some thought into education and change management.
There's a lot for all the stakeholders to be thinking about as this transformation unfolds, and there is no small amount of complexity and uncertainty.
But what is certain is that this is going to happen, and faster than the retirement transformation. Don’t be fooled by the failings of the first federal and state health care exchanges. Private exchanges haven’t taken off just yet, but when they do, the pace could catch many by surprise. Companies that make this transition successfully will be the ones that proactively prepare before these changes are thrust upon them.
Scott Carver is the president and co-founder of PlanSource, a software-as-a-service provider that offers payroll, benefits administration, health care exchange, decision support and HRMS technology services.
