EBRI Notes

"Finances of Employee Benefits: Health Costs Drive Changing Trends," and "Lump-Sum Distributions"

Dec 12, 2005 20  pages


Finances of Employee Benefits: Health Costs Drive Changing Trends

Rising health costs driving shift in benefits: The most recent data provide further evidence that rising health costs are driving a major shift in the finances of employee benefits. For decades, retirement costs accounted for the bulk of total spending on benefits by employers, but health costs are rapidly catching up.

Health costs account for the bulk of voluntary employer-provided benefits: Voluntary health care costs (spending on health insurance premiums) surpassed employer spending on voluntary retirement benefits (defined contribution and defined benefit plans) in 1989.

Benefits take a growing share of total compensation: Since employers tend to budget for total annual compensation costs (including wages, salaries, and benefits), these data show they are devoting a growing share to benefits (especially health benefits) and a declining share to wages and salaries. Wages and salaries remain overwhelmingly the dominant share of employers’ total compensation costs (81 percent), but significantly less than the share was about 50 years ago (95 percent in 1950).

Lump-Sum Distributions

Workers are increasingly offered a lump-sum distribution of retirement assets: As more workers are participating in defined contribution plans (such as a 401(k) plan) and are in defined benefit plans that allow a lump-sum distribution, more of them are faced with the decision of what to do with retirement assets upon changing jobs. Even among private-sector workers with a traditional pension plan, a growing proportion now have the option to take their benefit in a lump sum: 48 percent of full-time employees in 2002, up from 15 percent in 1995.

Increasing rollovers but leakage still significant: An increasing percentage of employment-based retirement plan participants are rolling over all of their lump-sum distributions and fewer are spending any of their distributions on consumption. But about 60 percent of those who took a lump-sum payment cashed out at least some of it.

Education and/or incentives needed: To significantly reduce the number of retirement plan participants who cash out their lump-sum distributions, more education or possibly incentives are needed to make them understand the importance or retaining these assets for retirement.