defined contribution a paradigm shift away from defined benefits?

Defined ContributionA paradigm shift away from defined benefits?

Agenda

• What are defined benefits?• What is defined contribution?• The unintended consequence: no subsidies• Solution to the unintended consequence• What does the IRC allow?• Selling versus advising• The Winners

What are defined benefits?

• An employer picks an Employee Benefits Advisor• Advisor collects info on what the employer wants to offer• Advisor hustles carriers and gets quotes for the dreaded spreadsheet• Employer choses a health plan• Employer may select other products like dental or vision• Advisor enrolls group• Employees have to accept what the Employer decides to offer

What is defined contribution?

• Employer defines a benefits budget• Employer allows an Advisor to interview employees on company time• Employee selects plans that are appropriate for their household• Employee is in charge of their decisions, not the Employer

• “Some of the companies I’ve worked with have already dropped benefits because of the exchanges. Some even say ‘Am I hurting my employees by offering insurance?’” Leavitt said. “[Dropping coverage] saves money for the company and, in some cases, gives workers better benefits for a cheaper price.”

Leavitt noted that he “really want[s] the employer system to stick around,” but isn’t feeling too hopeful.“I’m usually an optimist in this industry, but it’s not looking too good anymore,” he said.

Optimism

• New distribution channels, such as private exchanges, are offering attractive alternatives for both your clients and their employees in the future.• Consumers are evolving and demanding an improved buying experience,

one that understands who they are, anticipates their need and then offers a solution in a way that resonates with them on a personal level.• Social media, which has heavily influenced consumer buying behaviors in

the retail world, is making its way into the insurance sales cycle, as well.• Big data — large amounts of unstructured data about your clients’ habits,

preferences and relationships — is beginning to serve in a predictive way to fundamentally change how products are designed, brought to the market and sold.

The unintended consequence: no subsidies• If an Employer offers affordable coverage, the employee and their

dependents are not eligible for subsidies• Affordable coverage is defined being <9.5% of the employee’s

household income for the employee’s share of the self only coverage premium• Example: 9.5% of a $50,000 household income is $4,750. If the

employee has to pay more than $395.83 per month for self only coverage, the coverage is deemed unaffordable.

Solution to the unintended consequence• Employer may pay more and drop the employee’s cost below 9.5%• Employer may offer the employee a raise to ge the employee’s cost

below 9.5%• Drop the group plan

What does the IRC allow?

• IRS Publication 502• Section 105

IRS Publication 502

Medical Expenses Defined in IRS Pub. 502

BCBSTX Application – “the small print”

Qualifying Events (QE)

Selling vs. Advising

• Selling is a transaction• You are one rate increase away from being fired

• Advising is a relationship• You have multiple products in one household• Retention soars

The WinnersEmployees and their dependents, the Employer, and the Advisor

Winners: Employees and their dependents

Winners - Employers

Winners: Advisors

Before – Defined Benefits: Group Health• 18 life group – The Brokerage, Inc.• Dual option plan• $545 monthly employee premium

1. PPO $2,500, 70/50, $4k/$8k coinsurance, office copay and drug copay…or2. HDHP $5,000/100%, plus a $1,650 annual contribution to an HSA from the employer

• Paid employee premium = $117,720 per year

Before – Defined Benefits

• $75,000 group term life• Long Term Care Insurance• 401k plan with 10% employer match

Total annual cost to employer for these benefits: $35,000

Total annual cost for the defined benefit plan:$117,720 + $35,000 = $152,720 (18 employees = $8,484 per ee)

After – Defined Contribution

• Does the Employer need to spend $8,484 per employee per year?• What can an employee do with $8,484 ($707 per month)?• How could an Advisor help an employee to custom design a plan for

the employee’s household?

30 minutes per employee, per year

• $400 Bronze QHP (Male age 45)• $307 left to spend on:• Supplemental health plans• Long Term Care Insurance• Dental and/or Vision • Life insurance• Accident policy• LTD or STD• …whatever fits their needs

Employee Benefits Broker Total Commission• $117,720 premium for the group health plan at 4.5% commissions is

$5,297• Term Life - $7,200 x 15% = $1,080• LTC - $7,800 x 50% FYC = $3,900 (5% renewal = $390)• 401k – the broker did not ask, so zero commission

Total annual commission = $10,277

Household Advisor

• 18 employees represents 18 households• Assume there are 30 dependents

What could one household be worth?• Health plan – individual major med @ 6%• Term Life Insurance $500,000 at 90%• Dental at 20%• Critical Illness at 50%• 401k – group annuity at 5%

Advisor commission

• Health plan $4800 = $288• Term life on Ee $800 premium = $720• Term life on spouse $500 premium = $450• Dental for the family - $720 at 20% = $144• Critical illness for the family $1200 @ 50% = $600• 401k plan deposits at $3600 per year at 5% = $180

Total commission for the Advisor = $2,382 x 18 employees = $42,876