These drawbacks need to be weighed against the positive attributes of defined-contribution-style plans: they are more portable, employees have more control and accountability, and employers have cost outlays that are more predictable.
2. A shift away from the insurance concept will continue to swell the ranks of the uninsured and increase the need for government intervention.
As costs rise and small employers drop coverage altogether, many employees will be forced to go without. It’s not just cuts to benefits at individual companies that are increasing the number of uninsured; a shift in the workforce from manufacturing to services, which typically provides fewer benefits, is taking place. Just compare the benefits that Wal-Mart, America’s current largest employer, provides its workers with those of General Motors, which once held that distinction. Increasingly, state and federal governments will have to pick up more of the tab, with the Medicare Reform Act a sign of what’s to come.
3. Cuts to benefits could create less buying power for consumers, hurting employers as well.
Everyone knows that consumers are the engine of the American economy. The theory goes that cuts in benefits will mean lower consumer income, which “translates into lower consumption,” says Salisbury. “And to an economy extraordinarily dependent on consumer spending, that creates problems for American business.”
What can employers do to avoid these difficulties? A partial answer is to structure plans to secure as much future purchasing power for employees as possible. And one way to do that is to redesign 401(k)s so that all the assets stay in the account at all times. That means rethinking provisions that allow workers to get their hands on the cash through lump-sum distributions, hardship withdrawals, and loans. While those options were intended to make 401(k) plans more appealing to younger workers, they make them less effective at providing for retirement.
Similarly, consumer-driven health plans could be rebuilt for more staying power. If they increase the tendency of some people to skip, avoid, or delay medical treatment and that leads to additional health problems — especially among poorer workers — the backlash against such accounts might be substantial. The incentives in the plans need to be adjusted so that employees aren’t deterred from seeking needed care because their health accounts are too scanty. Already, many companies are structuring their plans so that preventive medicine is always covered, shielding the assets in the accounts.
Ultimately, Salisbury says, anything that employers can do to encourage workers to save more for their retirements and health care will help.
David M. Katz is deputy editor of CFO.com.