Thursday, May. 14, 2009

The Search for the Next Perk

Was it a mirage? Not just our formerly fat 401(k)s but also the whole idea of a comfortable work life followed by an evergreen retirement, replete with health coverage, perks aplenty and — oh, yes — pension checks as far as the eye could see.

Faced with the rapidly rising costs of such benefits, companies are scaling back. It's become distressingly clear that employees are increasingly on their own when it comes to retirement savings and health care. (See 10 things to buy during the recession.)

Employers don't typically trash an important employee benefit — too much negative press — but they are shifting more of these costs onto workers, who feel it in the form of higher health-care premiums, rising co-payments on drugs and much less certainty about their retirement finances. You may be able to preserve your benefits in your next job. But you'll have to spend more of your own money to do so.

Towers Perrin, a global human-resources-consulting firm, recently surveyed hundreds of U.S. companies representing more than 13 million employees on changes they are making — or contemplating making — to their employee-benefits packages. The knife cuts deepest on the most expensive benefits, with the biggest often being health care.

It costs the average American company more than $14,000 per year to provide coverage to an employee and her family. The employer response: shift more of that growing burden to workers. As a result, companies have seen their health-care spending rise 29% over the past five years, but employees have seen their outlays — for premiums, co-pays and deductibles — rise 40%.

Retiree health care is getting whacked hardest — just when the boomer generation needs it most. Of the employers surveyed, 45% have already reduced or eliminated subsidized health-care coverage for future retirees, and an additional 24% are planning to do so or considering it. Of those offering the perk, roughly 25% put a dollar cap on how much they will spend per retiree. "Once the cap is reached, future inflation risk transfers to the retiree," notes Ron Fontanetta, an executive with Towers Perrin.

Corporate pensions, the third leg of the proverbial retirement stool (the other two being Social Security and personal savings), are also being eroded as the foundering stock market wreaks havoc on employer pension funds. At the end of 2008, employer-sponsored pension plans were underfunded by more than $400 billion, according to Mercer, a management-consulting firm. The recent stock-market rally has halved that deficit, but it remains a funding sore spot and is one more reason that companies are turning away from this benefit. In mid-May, Cigna, the big insurer, joined a growing list of employers in announcing that it was "freezing" its pension plan — ending the accrual of new pension benefits for its workforce.

"Companies initiated many of these benefits in a different time," says Fontanetta. "Retiree benefits started being offered when many companies had a young workforce with few retirees, so it was not really a cost they had to contend with." Today it's the reverse, particularly in old-line industries. Detroit's Big Three automakers, for example, have more than four times as many retirees as active hourly workers.

Yet as some benefits disappear, others are blossoming, better suited to business realities and, in some ways, more prized by the younger workers that companies want to attract. That can mean account-based plans, like the 401(k), with a generous employer match (in flush times), or a more recent innovation known as the cash-balance pension. It treats younger workers better than traditional pensions because it's based on pay and ignores tenure. It stacks up well against 401(k)s too because it typically grows with a fixed rate of return, so it will not be upended by a bear market.

And what will become of employer-sponsored health care? A little over a year ago, Towers Perrin asked workers to rank specific benefits and perks. The 45-and-over age groups ranked base pay and health care as their top two. The 18-to-34 age groups — the workers employers have their eye on — ranked base pay along with career advancement as their top priorities. The younger workers did not rank "retirement benefits" in their top 10, while that choice ranked third for the over-55s.

Too bad, boomers. You are no longer calling the tune on benefits.

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