While employer costs for their workers’ health care plans continue to rise, their share of workers’ retirement costs continue to decline. But at what point does that trend negatively affect productivity, and ultimately the employer’s bottom line? 

Willis Towers Watson addresses that dilemma and other benefits trends across industries in its report, “Shifts in benefit allocations among U.S. employers.” 

“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,” the study says. “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.” 

The firm analyzed information in its proprietary database of retirement and health care programs at over 500 employers with at least 200 employees, and found that active health care costs doubled from 2001 to 2015, rising from 5.7 percent to 11.5 percent of pay. 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. 

Conversely, total retirement costs declined by 25 percent between 2001 and 2015, from 9.1 percent to 6.8 percent of pay. Over that period, many employers shifted away from defined benefits plans as their primary retirement vehicle, typically replacing them with an enhancement to the existing defined contribution plan. In fact, defined contribution benefits increased by 1.6 percentage points between 2001 and 2015, which wasn’t enough to replace the 2.9 percentage-point loss in defined benefit plan benefits. Eliminating post-retirement medical plans for new hires and reducing employer subsidies also played a role in reducing overall retirement cost, as post-retirement medical values declined by one percentage point over the analysis period. 

“These trends reflect a seismic shift in the allocation of benefit dollars,” the study says. “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.” 

Across industries, active health care costs are substantial for all sectors, ranging from 10.4 percent of pay in the retail sector, to 12.7 percent of pay in the oil, gas and electric sector. 

However, employer costs for retirement benefits vary much more widely across industries, averaging 12 percent of pay in the oil, gas and electric sector, compared with roughly 5.5 percent of pay in the health care, high-tech and retail industries. 

“Utility, energy and natural resource companies have some of the highest pension sponsorship rates among sectors,” the authors write. “Utilities are typically heavily unionized and generally prefer to maintain a consistent retirement structure for both union and nonunion workers. Moreover, many oil, gas and energy jobs are physically demanding, and defined benefit plans facilitate retirement at an appropriate time.” 

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

“The high-tech and retail sectors have had low defined benefit plan sponsorship rates historically, as defined contribution plans are probably a better fit for their more mobile workforces — relatively high turnover makes portability more important,” the study says. “Defined contribution values have remained comparatively low for this group as there typically has not been a pension loss to prompt employers to enhance defined contribution benefits.”

Now that the shift from defined benefit plans to defined contribution plans is well established, Willis Towers Watson recommends that 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,” the authors write. “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.”