The Doubt of the Benefit

Voluntary benefits may seem like a win-win. Here's why they could be a lose-lose.

Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It’s easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.

But voluntary benefits are not necessarily a win-win—in fact, they could be just the opposite. Consider the case of UnumProvident Corp., the nation’s largest disability insurer. In 2003, voluntary offerings represented about 40 percent of Unum’s U.S. brokerage sales. Over the past year, however, policyholders have accused the self-described “leader in income protection” of systematically denying disability claims.

Management at Unum, which recorded a net loss of $386.4 million in 2003, has denied the charges. But regulators in 45 states are conducting a joint market-conduct exam of Unum’s handling of claims—the largest such review in U.S. history. That probe is likely to be completed sometime this summer.

Such problems with a vendor can turn into a morale-buster for employees, and a headache for their employers.

Worse, insult may be added to injury if employees who bought a product believe their employers endorsed the vendor in question. In practice, few companies stand by supplemental plans, because doing so makes it more likely that a program will fall under the purview of the Employee Retirement Income Security Act (ERISA)—which substantially raises a plan sponsor’s reporting, disclosure, and fiduciary responsibilities. Warren Steele, senior vice president of marketing at insurer AFLAC, believes that less than 10 percent of the company’s corporate clients treat voluntary programs as ERISA plans. (An official at AFLAC notes, however, that Mr. Steele does not know the exact percentage.)

Critics claim that it’s in the vendor’s interest for the sponsoring company to back its products—and not just to boost sales. Attorneys point out that, generally, ERISA favors insurers over employees in policy disputes. ERISA preempts some state law, which can mean cases are heard by judges, not juries—a huge plus for defendants. More important, ERISA prohibits workers from suing insurers for punitive damages.

In fact, when sued by a policyholder, an insurer’s first move is usually to try to convince a judge to rule that a supplemental plan is an employee welfare benefit plan (and hence subject to ERISA). Such a ruling could be bad news for an employer, which can suddenly find itself running afoul of Department of Labor (DoL) regulations. As for policyholders, the inability to sue for punitive damages may make it difficult to find an attorney to take a case. “This is a disaster for employees,” declares Joseph Belth, professor emeritus of insurance at Indiana University. “They’re being taken to the cleaners.”

Message: We Care

None of this is cheery stuff for companies with voluntary benefit programs. And that’s getting to be a long list. According to Avon, Connecticut-based advisory firm Eastbridge Consulting Group, which conducted the survey cited above, sales of supplemental worksite insurance topped $4 billion in 2002, double the amount sold just five years earlier.

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