Top Employer Reasons for Switching to Defined Contribution Model

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A new research brief from the Prudential Insurance Company of America has revealed that nearly half (47%) of U.S. employers have reported that they are moving or have moved to a Defined Contribution model for healthcare benefits.

This is according to Group Benefits and the Defined Contribution Model from Prudential’s Eighth Annual Study of Employee Benefits: Today & Beyond. As full implementation of ACA legislation is scheduled by 2015, many employers are rethinking the way in which they administer health benefits. The brief reveals the top two reasons employers list for considering the switch from traditional Defined Benefits (DB) to a Defined Contribution (DC) model for employee healthcare benefits.  

Top Reasons for Defined Contribution

1. Lower healthcare costs

Not surprisingly, employers indicated that the top reason behind the switch is financially motivated with more than half (59%) reporting that DC will help lower their healthcare costs. Employers consistently report concern over unpredictable, rising healthcare costs both pre and post- ACA legislation. DC allows employers the opportunity to contribute a pre-determined amount of money towards an employee’s health benefits plan, allowing the employee to shop around for competitive and customized plans. 

2. Offers employees more plan choices

Because the DC model shifts plan selection from the employer to the employee, it offers employees more choices in how their healthcare benefit dollars are spent. This was the second most popular reason listed among employers with 40%.  Health plans are not one-size fits all, so by setting aside a definitive amount of money for employees to shop around for a plan that suits them best, they ultimately have more say and more control. The study also found that employees would allot 75% of benefit dollars towards health, dental and vision coverage, while leaving 25% to go towards other coverages such as voluntary life, disability, accident, and critical illness insurance.

“While employers struggle to fund increasing health care costs and more look to shift to DC plans, employees will realize a higher level of choice when it comes to benefits selection and aligning their benefit dollars with personal priorities,” said Jim Gemus, senior vice president, Products, Prudential Group Insurance. “Carriers and brokers have an opportunity to ramp up employee awareness and educational efforts in order to help ensure employees fully appreciate the value of the voluntary benefits available to them.”

Brokers and Defined Contribution

The study also surveyed brokers about this employer shift to DC.  A majority, 47%, indicated DC benefits plans will result in more dollars allocated to funding healthcare.  In regards to its effect on voluntary sales, 42% think it will lead to an increase in sales while 44% think sales with stay the same.  They see the largest boost in voluntary sales over the next 5 years coming from employees having more choices than in the past, while the largest detriment coming from a lack of recognition among employees of their own financial needs.  

Read the full press release from Prudential here.  The complete Group Benefits and the Defined Contribution Model brief is also available for download.

Fore more information on making the switch to a Defined Contribution model, check out these Tips for Building Your Defined Contribution Strategy. And don’t forget to register for our Defined Contribution Today eNewsletter to get the latest DC trends directly to your inbox! 

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