Defined Contribution A paradigm shift away from defined benefits?
Agenda • What are defined benefits? • What is defined contribution? • The unintended consequence: no subsidies • Solution to the unintended consequence • What does the IRC allow? • Selling versus advising • The Winners
What are defined benefits? • An employer picks an Employee Benefits Advisor • Advisor collects info on what the employer wants to offer • Advisor hustles carriers and gets quotes for the dreaded spreadsheet • Employer choses a health plan • Employer may select other products like dental or vision • Advisor enrolls group • Employees have to accept what the Employer decides to offer
What is defined contribution? • Employer defines a benefits budget • Employer allows an Advisor to interview employees on company time • Employee selects plans that are appropriate for their household • Employee is in charge of their decisions, not the Employer
“Some of the companies I’ve worked with have already dropped benefits because of the exchanges. Some even say ‘Am I hurting my employees by offering insurance?’” Leavitt said. “[Dropping coverage] saves money for the company and, in some cases, gives workers better benefits for a cheaper price.”Leavitt noted that he “really want[s] the employer system to stick around,” but isn’t feeling too hopeful.“I’m usually an optimist in this industry, but it’s not looking too good anymore,” he said.
Optimism • New distribution channels, such as private exchanges, are offering attractive alternatives for both your clients and their employees in the future. • Consumers are evolving and demanding an improved buying experience, one that understands who they are, anticipates their need and then offers a solution in a way that resonates with them on a personal level. • Social media, which has heavily influenced consumer buying behaviors in the retail world, is making its way into the insurance sales cycle, as well. • Big data — large amounts of unstructured data about your clients’ habits, preferences and relationships — is beginning to serve in a predictive way to fundamentally change how products are designed, brought to the market and sold.
The unintended consequence: no subsidies • If an Employer offers affordable coverage, the employee and their dependents are not eligible for subsidies • Affordable coverage is defined being <9.5% of the employee’s household income for the employee’s share of the self only coverage premium • Example: 9.5% of a $50,000 household income is $4,750. If the employee has to pay more than $395.83 per month for self only coverage, the coverage is deemed unaffordable.
Solution to the unintended consequence • Employer may pay more and drop the employee’s cost below 9.5% • Employer may offer the employee a raise to ge the employee’s cost below 9.5% • Drop the group plan
What does the IRC allow? • IRS Publication 502 • Section 105
Selling vs. Advising • Selling is a transaction • You are one rate increase away from being fired • Advising is a relationship • You have multiple products in one household • Retention soars
The Winners Employees and their dependents, the Employer, and the Advisor
Before – Defined Benefits: Group Health • 18 life group – The Brokerage, Inc. • Dual option plan • $545 monthly employee premium • PPO $2,500, 70/50, $4k/$8k coinsurance, office copay and drug copay…or • HDHP $5,000/100%, plus a $1,650 annual contribution to an HSA from the employer • Paid employee premium = $117,720 per year
Before – Defined Benefits • $75,000 group term life • Long Term Care Insurance • 401k plan with 10% employer match Total annual cost to employer for these benefits: $35,000 Total annual cost for the defined benefit plan: $117,720 + $35,000 = $152,720 (18 employees = $8,484 per ee)
After – Defined Contribution • Does the Employer need to spend $8,484 per employee per year? • What can an employee do with $8,484 ($707 per month)? • How could an Advisor help an employee to custom design a plan for the employee’s household?
30 minutes per employee, per year • $400 Bronze QHP (Male age 45) • $307 left to spend on: • Supplemental health plans • Long Term Care Insurance • Dental and/or Vision • Life insurance • Accident policy • LTD or STD • …whatever fits their needs
Employee Benefits Broker Total Commission • $117,720 premium for the group health plan at 4.5% commissions is $5,297 • Term Life - $7,200 x 15% = $1,080 • LTC - $7,800 x 50% FYC = $3,900 (5% renewal = $390) • 401k – the broker did not ask, so zero commission Total annual commission = $10,277
Household Advisor • 18 employees represents 18 households • Assume there are 30 dependents
What could one household be worth? • Health plan – individual major med @ 6% • Term Life Insurance $500,000 at 90% • Dental at 20% • Critical Illness at 50% • 401k – group annuity at 5%
Advisor commission • Health plan $4800 = $288 • Term life on Ee $800 premium = $720 • Term life on spouse $500 premium = $450 • Dental for the family - $720 at 20% = $144 • Critical illness for the family $1200 @ 50% = $600 • 401k plan deposits at $3600 per year at 5% = $180 Total commission for the Advisor = $2,382 x 18 employees = $42,876