Small employers are underserved by the employee benefits industry, time for change

Small businesses are the backbone of our nation’s economy, representing 99.9% of all U.S. businesses, according to the U.S. Chamber of Commerce.

Yet, despite employing huge numbers of Americans, small employers often find themselves overlooked or underserved by the employee benefits industry compared to their larger counterparts. As Head of the Employee Benefits business at Equitable, I’ve been watching the industry trend of benefits brokers and insurance carriers alike struggling to meet the unique needs of small business employers, limiting their ability to offer employees comprehensive benefits packages—or even any benefits at all.

This creates a ripple effect, since small businesses with limited or no employee benefits may struggle to recruit or retain talent. Particularly as health care costs continue to rise, mental health challenges are commonplace, and financial insecurity is growing, employer-sponsored benefits—including and beyond health insurance and retirement—have never been more important to employees and their families.

So as we lean into Small Business Week, it’s an ideal time for leaders in the employee benefits industry to reflect on why small employers are underserved and how to ensure they receive the attention and care they deserve when navigating employee benefits.

Small businesses face unique obstacles in a challenging economic climate

Small employers often face a number of obstacles that prevent them from offering comprehensive employee benefits, such as cash flow issues, limited HR resources, lack of bargaining power with insurance carriers due to their small size, and regulatory complexities.

Inflation is also still problematic for both consumers and businesses. A recent Equitable survey, for example, found that inflation topped the list of concerns standing in the way of consumers’ financial goals by a large margin. And if inflation is still a concern for consumers, then the small businesses that serve them are feeling the squeeze too. In fact, a March 2024 survey from the National Federation of Independent Business Inc., found that small business optimism has reached the lowest level since 2012, citing inflation pressures as the top business problem for small business owners.

Further, the one-size-fits-all approach that is so common in our industry often fails to address the specific needs and nuances of small employers. Realistically, designing a benefits package for a business with three employees is going to look a lot different from crafting a benefits strategy for a business with 50 employees.

 A historically underserved market

The employee benefits industry has historically focused on larger clients who can bring in higher premiums and commissions. With this bias toward larger employers, smaller employers often have a difficult time finding benefits brokers and consultants that can help them navigate the process of selecting the right group insurance carrier. The complexities of administering benefits for small groups and the perceived lower profitability have contributed to this disparity as well.

Closing the gap

Increasing access to and usage of employee benefits at the smaller end of the market—particularly group insurance benefits—is going to take a collective effort and shift in mindset on the part of both carriers and brokers. Here are actionable strategies that can help close the gap.

1. Level the playing field for financial professionals, benefits advisors, consultants, and benefits brokers to make the smaller end of the market more attractive.

While everyone in our industry is focused on improving the financial security of people and businesses, intermediaries cannot do this if they can’t sustain their own businesses. Many benefits brokers shy away from the small employer market because of the administrative costs involved, which make it difficult for them to scale their businesses.

This is where carriers who already competitively serve the smaller end of the market can make a difference. These carriers, which typically have efficient systems and streamlined processes for underwriting, implementation, onboarding, account management and innovative technology can help shoulder some of the burden that falls on intermediaries. They can reduce the administrative burdens brokers tend to experience working with smaller employers and can sometimes even offer brokers higher than average commissions because these carriers have already reduced their operating costs in other areas—making the smaller employer market more attractive for brokers and other intermediaries.

2. Tailor solutions to meet small businesses where they are.

The employee benefits industry has an opportunity to do a better job of showcasing the breadth and depth of workplace benefits options available. Small employers often have a very limited view of the benefits available in the marketplace and are looking to benefits advisers to recommend the best options.

Benefits advisers and brokers should develop customized benefit packages that align with the unique needs and budget constraints of small businesses. For example, voluntary offerings, which cover a wide range of benefits, like hospital indemnity, critical illness, accident insurance, long-term disability, pet insurance and others can be ideal for small business owners on a tight budget who want to offer their employees affordable options without compromising quality. There are many small businesses out there that don’t recognize that there are some benefits they can offer that don’t cost them anything, and voluntary falls into that category.

Benefits advisers and brokers need to stay abreast of all the innovations in this space and always be ready to help their small business clients pivot to other options as their businesses grow and the needs of their workforce evolve.

3. Advocate for change at the policy level.

With the passage of SECURE 1.0 and SECURE 2.0, we saw firsthand the impact when the private sector, retirement plan industry, non-profit sector and policymakers rallied together to help increase access to workplace retirement plans, especially for small businesses. We’ve also seen movement on the legislative front to expand access to paid family leave plans at the state level, with 13 states and the District of Columbia guaranteeing workers the right to paid leave and an additional eight providing voluntary systems that provide paid family leave through private insurance.

Related: SECURE 2.0: A win-win for small businesses, employees and forward-thinking advisors

As leaders in the employee benefits industry, we should be asking ourselves if there’s more we can do at the policy level to help reduce administrative burdens and compliance complexities for small employers and make offering benefits more feasible and attractive. We should also think creatively about maximizing the effectiveness of infrastructures already in place that provide American workers with access to employee benefits like associations and other pooled employer solutions. Policymakers at the federal level are already exploring potential solutions. For example, this year, the House Bipartisan Paid Family Leave Working Group developed a framework for potential legislative options to provide more families with access to paid leave. The options include a public-private partnership pilot, coordination and harmonization of paid leave benefits across states, small employer pooling for paid leave insurance, and improvements to paid leave tax credits for small businesses and working families.

Once we acknowledge the underserved nature of the small employer market within the employee benefits industry, we can start becoming better advocates for small businesses by helping them to navigate employee benefits more efficiently. By doing this, we can create a more inclusive ecosystem that enables small businesses to feel seen, compete in the war for top talent and, most importantly, better serve their employees and customers.

Stephanie Shields is Head of the Employee Benefits business at Equitable.