Organizations are increasingly offering a wide range of benefits to employees, but poor plan design and rising costs can have significant impacts. Companies need to adopt a risk management approach to control and mitigate these threats — protecting their people, reputations and even bottom lines.

Employer-sponsored benefits plans have become a central pillar of the employee value proposition with increased C-suite attention. When done effectively, these plans deliver tremendous value to the organization and the workforce, but like any other investment, they must be managed to ensure cost-efficiency. 
 

Many companies are going beyond insurance benefits to offer a broad range of well-being initiatives, savings, retirement, perquisites, paid time off and allowances.
 

However, providing these benefits is becoming ever more expensive, leading to an increased focus on cost-containment. For instance, our medical trends research shows that health costs rise at almost three times the rate of inflation.1
 

At the same time, errors and poor decisions around design, financing, administration and vendor management can have substantial implications for the business — potentially leading to reputational and financial damage.
 

In many cases, employers also have fiduciary or compliance obligations to meet, meaning the burden of financial and governance risk grows. Therefore, companies are increasingly looking to centralize decisions to ensure agility in strategy execution, improve visibility and reduce risk.
 

At Mercer Marsh Benefits (MMB), we believe there are five key governance and financial risks organizations must address to protect their reputations and their bottom lines:
 

  • Increasing health, risk protection and well-being benefits costs: Increased spend results from factors such as reduced insurer risk appetite, medical inflation, higher premiums due to increased utilization, and an increase in claims duration and severity, along with other expenses.
     
  • Pension financial risks: Investment, inflationary and longevity risks affect the plan sponsor’s financial commitments to the retirement plan (balance sheet, cash and expense). Additional risks result from inadequate individual retirement savings.
     
  • Administration and fiduciary: An inability to administer plans accurately, fairly and in accordance with promises made or to prudently manage employee benefits programs or investment funds results in errors and unmet obligations.
     
  • Legal and compliance: Misalignment of benefits and other HR practices and programs with regulatory requirements and tax, labor, human rights and employment law leads to fines, penalties and litigation.
     
  • Benefits decision-making and accountability: Outdated benefits plan design, financing, and vendor selection and management, and poor communication and administration decisions due to lack of controls or expertise result in increased costs, liabilities and commitments.

Employers need to respond to and control these risks while showing prudence in managing funds and making decisions on behalf of employees, and they must be fair and consistent in the rules they apply.
 

Those that don’t manage risks face unpleasant consequences, such as surprise accounting expenses and liabilities associated with retiree medical benefits and benefit promises that can’t be met due to missing exclusions or a lack of financial incentive to return to work. Poor compliance with regulatory requirements and tax or other legislation can also lead to fines, penalties and litigation.
 

Multinationals, in particular, often benefit from a global benefits management offering because it helps provide visibility into potential risks across employee benefits plan arrangements. Multinationals typically use dozens of insurers for global benefits. Choosing and negotiating with vendors at a local level can lead to inefficiencies and may prevent them from leveraging economies of scale across their global broking. And although such organizations need to take local regulations and customs into account, they also want to create an overarching global — or regional — strategy to incorporate their local benefits plans. Bundling these plans under regional and global benefits management arrangements reduces workload, maximizes financial impact and ensures governance consistency.
 

Employers need to develop a cost-containment plan that’s right for them to make sure their benefits programs are sustainable from a cost and risk perspective. This typically encompasses plan design, health risk management and efficiency-related opportunities. 
 

Important questions to think about:

  • What steps are you taking (at the local and global levels) to ensure benefits are being managed appropriately in each country?
  • Do you have specific strategies to manage health risk and steer people to high quality, efficient care to manage costs? 
  • How do your local HR teams report upward into headquarters and seek approval or guidance regarding benefits design and placement?
  • Have you taken an enterprise risk management approach to your benefits programs to address the risks inherent in your benefits plan, including unsound placement, compliance and cost escalation?  

Conclusion

As employers of all sizes reinvent different areas of their businesses to keep up with market trends, they also need to look at the scope and level of benefits they provide for their workforces and how they finance, deliver and govern these programs, using a risk-management approach. Organizations across all sectors face numerous challenges in delivering high-quality employee benefits. These challenges are often intensified for multinationals, which must address country-specific nuances — often within decentralized operations. It all starts with articulating a well-defined employee benefits strategy that reflects an enterprise risk-management lens. This includes ensuring that decision-making rules align with the business structure and objectives and that a multiyear cost-management strategy is in place.

Speak with a Mercer Marsh Benefits consultant