Strategy for Savings: Take Aim at Benefits Costs

Employee benefit plans, as a major component of any bank's operations costs, have become a prime target for cost reduction.

Unfortunately, the complexity of benefit plans -- and the sensitivity of employees toward any proposed changes -- make a difficult challenge of cost reduction in this area.

Of course, quick fixes are possible. Banks and other businesses can simply reduce benefits or increase employees' share of the costs. But savvy companies, rather than shifting costs, are reworking their programs to increase efficiency.

In the long run, such actions can lower the cost of providing benefits, while improving their value to a bank and its employees.


* Reduce vendors' fees on retirement plans by performing administrative functions in-house.

Large banks, in particular, may be able to handle record-keeping and valuation calculations, projections of what it will take to fund a plan and meet its obligations.

The role of an outside company -- an actuarial firm, for example -- could be limited to a review of the final calculations.

* Cut annual, fixed employer contributions to retirement plans. Link future contributions to the bank's performance.

Cash compensation is linked increasingly to an employer's performance -- measured by the overall percentage of pay at risk and the job levels at which incentive plans apply. By this logic, benefits for employees can also be linked to performance.

This type of system guarantees an annual, base-level contribution to a retirement plan. But any additional employer contributions depend on performance.

Although the long-term cost of the plan may be unchanged, the timing of the contributions will match the bank's ability to pay. Such changes can be accomplished by modifying or adding to existing plans.

* Redesign retiree health-care eligibility.

One pending change in federal accounting standards, FAS 106, will require banks to show the cost of providing benefits to future retirees as a current expense. Many employers still use nominal criteria to determine eligibility for full retiree health insurance.

The reward of full retiree health benefits should be limited to employees who have served the bank for their full career. Partial careers should earn a reduced benefit or a higher retiree-contribution requirement.

Revising the period during which service is credited should also be considered. This may reduce the immediate impact of FAS 106, without materially affecting the benefits of any employee.

* Define the cost of health-care plans.

Most retiree health plans are at the mercy of inflation. To rein in costs, employers can switch to an approach in which either their side of the contribution or the benefit itself is a function of the employee's years of service.

Health benefits should also be designed to be consistent with the pension and other retirement-income plans.


* Restructure employee contributions to health maintenance organizations.

Even when the HMO charges lower rates than the indemnity plan, the HMO may still increase the bank's costs if healthy employees enroll in the HMO.

Federal HMO regulations now permit some flexibility in determining employee contributions to such organizations. In essence, employees electing an HMO can now be required to pay their fair share.

In addition, enrollment patterns should be monitored and, if possible, claims data should be gathered from HMOs. For larger banks, this analysis can be used to negotiate funding arrangements that fairly share the risks and rewards of HMO participation.

* Negotiate with vendors.

Drive a hard bargain with benefits providers, so that you purchase only necessary services.

Most insurance companies offer services and risk protection together, as a package. For example, costs can be reduced by canceling -- or farming out to a third party -- such extraneous services as printing employee benefits booklets.

Also important is a bank's choice of how much "stop-loss,' or risk, protection to purchase. Such protection limits a bank's possible losses when employees' health-care costs exceed expectations.

While too little risk protection can jeopardize a bank's cash flow, too much protection can be wasteful.

* Adopt a managed health-care plan.

Under plans becoming more prevalent today, employees are often given the freedom to use health-care providers who are not part of the managed-care network. But if they so choose, these employees are reimbursed at a lower level.

As a result, most employees usually choose to see care providers in the network, where the company has maximum bargaining clout. Perhaps more important, however, these providers are given incentives to use medical services appropriately.

In the areas of mental health and substance abuse, managed care may be provided by an employee-assistance program.

While helping employees and their families to locate appropriate care, an employee assistance program can also monitor the course of treatment and recommend limits on the duration of care. The decision to use an EAP can be voluntary, or it can be encouraged through deductible and reimbursement incentives similar to those used in other types of managed care.

* Monitor who uses your health insurance -- and why.

To improve the efficiency of a health-care plan and ensure that proposed changes hit the mark, watch for emerging patterns.

Such information should be available from the claims administrator. The process of analysis need not be expensive.

In addition, work with your administrators of disability and workers' compensation to locate and address any patterns of work-site injuries. It may be possible, through additional training or the simple restructuring of work stations, to prevent some of these disabilities.

For example, if workers in a particular department are filing disability claims related to back pain, the reason might be their chairs.


* Consider the longer-term impact of flexible benefits plans.

In the long term, flex plans usually save money. In the short term, though, such an arrangement will be a cost drain -- unless a company arranges to scale back the rate of increase in its contributions to employee benefits.

Here's why.

Under some flex arrangements, employees are offered a defined amount of money to spend on a mix of benefits. But those who are generally healthy, or those with other insurance coverage -- say, from a spouse -- sometimes opt out of medical and other health-care plans.

The net effect is that employees who use these plans less frequently tend to migrate out, using their allotment from the company to buy other benefits. Remaining in are those who draw on their benefits more often. The result is an increase in the overall cost of the program.

In the long run, however, benefit costs can be controlled by limiting the annual increase in the employer's contribution and by requiring employees to pick up a large portion of any cost increases.


* Weigh the merits of exchanging "hard" benefits for "soft" benefits.

Employers can trade benefits that have a definite cost -- for example, a generous health plan or other insurance -- for benefits that may have a smaller cost impact, such as off-the-job privileges.

* Use part-time employees.

Benefit costs can be reduced by using part-time employees. Such employees are usually excluded from many benefits and are required to pay a higher portion of the cost of the benefits available to them.

But there's a balancing act here: Providing some benefits to part-time employees can be a powerful inducement for them to work at the bank.

* Add high-profile/low-cost benefits.

Usually popular among employees are low-cost benefits. They include programs to help stop smoking, stress-management sessions, blood-pressure and other health screenings, and subsidized health-club memberships. And benefits in this category may help reduce future medical costs -- and demonstrate an employer's commitment to employees.

Some low-cost benefits are purchased through group discounts: Some examples are vision care and access to referral services such as day care and elder care.

Another possibility is to add flexible spending accounts that entitle employees to set aside pre-tax dollars. Accounts of this type can be used to pay for health expenses not covered under existing plans, or for child day care.

PHOTO : JOHN M. WALBRIDGE JR. said quick fixes may not be the best way to slash the tab for employee benefits.

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