The road to more personalized benefits: What brokers need to know

For benefits brokers, recognizing and accepting change will be half of the battle. But once they can do that, the road is open to playing a significant part in this transition.

Because lifestyle spending accounts are post-tax accounts, the IRS does not mandate eligible expenses; rather, the employer decides what they’d like to cover for employees.

In the ever-evolving U.S. employment market, the need for workplace benefits that provide employees with flexibility has taken center stage like never before. Job seekers are no longer content with standard benefits packages, and existing employees are scrutinizing whether their current offerings match up to their needs. In other words, employees today want more personalized benefits that support both their professional growth and personal development.

In response, organizations are beginning to adapt their benefits structures to accommodate this growing desire for more personalized benefits. Yet there remains a problem. Most organizations remain wedded to providing group benefits – which lack the flexibility required for true personalization. This means organizations will need to devise new ways to bring individual benefit options to employees, and that has huge implications for benefits brokers.

The problem with group benefits

Every benefits broker knows that group insurance products, long the cornerstone of employee benefits, face significant limitations when it comes to personalization. This limitation stems from the inherent rigidity of group plans, which offer a uniform set of benefits to all employees.

If you were to ask a carrier to introduce personalization into this sort of plan, alarm bells will go off in their heads because they’ll immediately think of adverse selection, in which individuals with a higher likelihood of needing insurance are more likely to join a particular insurance plan than those with a lower likelihood of needing such benefits.

This situation can put carriers in a difficult spot: they have to provide multiple benefits under a single policy, but with no clear idea of who’s going to pick what. There’s no way to price something in a personalized way without causing adverse selection, which would lead to unsustainable loss ratios for the carrier.

The other thing with personalizing group benefits is that “benefits” and “insurance” are not one and the same. That’s something a lot of brokers forget, since it’s the insurance products that they make their commissions from. But while insurance is critical, it’s not the sole component of a comprehensive benefits package. Benefits encompass a broad spectrum of offerings, from wellness programs to paid time off to flexible work arrangements. Acknowledging this broader perspective will be vital for benefits brokers as they navigate the shifting landscape toward personalized benefits.

How organizations can adapt

By now, it should be clear that group insurance – be it health, life, or dental – is not the way to go when seeking to personalize your benefits. It simply doesn’t work. That leaves individual insurance products as the only option, which then raises the question of how companies can bring that option to employees.

To me, the simplest answer is to use lifestyle accounts. This involves providing each employee with an annual set sum. How much an employer wishes to contribute is up to them, though I would suggest contributing no less than $1,000 per employee. Regardless of the exact amount, once employees have these funds in their lifestyle accounts, they can then spend them on whatever benefits they wish on the individual marketplace.

For example, one employee might choose a 10-year term life policy with disability coverage, along with a few wellness benefits like financial counseling and stress management programs. Another employee might prefer a whole-life policy, pet insurance, and nutrition counseling. The beauty of this setup is that there’s no end to how an employee can custom tailor their benefits. That’s about as personalized as you can get.

Of course, there is the question of how an organization is supposed to fund these lifestyle accounts. The answer is through reallocations of the health insurance budget. Ask any company where most of their benefits spending is going and they’ll tell you health insurance. It’s such a big part of the budget that it tends to drown out discussions on other benefits.

My advice would be this: don’t start with health insurance when determining your budget allocations. Instead, start by looking at what your organization is currently spending per year, per employee, on all the benefits combined. Once you have that number you can begin working out how much a typical employee will need in a lifestyle account, then you can put the remainder of the budget into the health insurance.

I really can’t stress enough how important this reallocation strategy is. Because right now, health insurance spending is out of control, and getting higher with each passing year. The day may not be far off when health insurance consumes the entire benefits budget. Something has to give eventually. So, take the necessary steps now to wind down your health insurance spending and put that money towards the personalized benefits your employees truly desire.

What does this mean for benefits brokers?

I can imagine there might be a lot of resistance from benefits brokers to all I’ve just said. If employers start diverting money away from group insurance products and toward lifestyle accounts, that might mean that brokers are going to make less money. But keep in mind that some of those reallocations are going to find their way into insurance products on the individual marketplace. So rather than making most of your money through group insurance, those earnings get spread around into various types of insurance products. That’s how you make your money in this new benefits landscape.

The fear comes from not knowing how to do that, because, up until now, brokers have only ever worked in a group insurance world. They can’t see that it is possible to get into the individual marketplace and I’m here to say it absolutely is possible.

Moreover, whether a broker likes it or not, this is where things are heading in the benefits landscape. HR departments know that the future of employment will be based on personalized benefits and the only way to do that is by switching to the individual marketplace. Large national insurance agencies also know this, of which two great examples are Gallagher Marketplace and Mercer Indigo. Both of these agencies are currently investing heavily in building these individual marketplaces because they can see that’s where things are going.

Related: Lifestyle spending accounts: What employers need to know

What this means for benefits brokers is that they need to recognize and adapt themselves to these changes. And believe me, this shift toward more personalized benefits will gain increasing traction as more of the baby boomer generation retires. The millennials and Gen Zers that are replacing them have grown up in a world where almost everything is personalized, and you can bet that they’ll expect the same of employee benefits. So, start now on adapting your benefits to meet those needs.

Final thoughts

Today’s workforce needs a more balanced and personalized approach to employee benefits. That won’t happen without a committed strategy to bring individual insurance and wellness perks to more employees through lifestyle accounts. When properly funded through budget reallocations, these lifestyle accounts can empower employees to shape their benefits however they see fit. For benefits brokers, recognizing and accepting this change will be half of the battle. But once they can do that, the road is open to playing a significant part in this transition.