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Benefits for employees not expected to erode significantly

What happens to benefits as labor markets soften?

Until recently the labor market has been so tight in a booming economy that enhanced employee benefits were being used to attract and retain quality employees. But with the economy softening, there are concerns that employee benefits may be cut.

“A general downturn would squeeze profits and put more pressure to cut somewhere,” said James H. “Jimmy” Hinton, vice president of marketing for The ProTech Group, Ridgeland. “Employer-paid benefits are often one of the easiest to cut. Note it may be some time before that really happens. Currently, even with the layoffs, employment is still at historically high numbers.”

Hinton said there has been a trend in some regions of the country to shift to an employee benefit menu of “one-size-fits-all” benefits.

“We have in the main taken the cookie cutter approach to benefits,” Hinton said. “But survey after survey has shown that employees want choices — even if they have to pay for them.”

Medical premiums continue to escalate at double or triple the rate of inflation, which is making it difficult especially on small businesses that continue to have difficulty obtaining affordable insurance. Hinton says certain areas like prescription drug cards are huge losers and could be among the first benefits to go.

If the economy continues to slow down, the possible impact on employee benefits may be felt more in some regions of the state than others. For example, Hinton said the new Nissan plant will affect the entire mid-Mississippi market. “They will become the benchmark,” he said.

Eric Elam, president and Elam Consulting Inc., Jackson, doesn’t see employers cutting back on benefits.

“At the maximum, some employers may limit any matching of funds each employee puts into the retirement plan,” Elam said. “Our experience is that other benefits do not reduce in economic downturns. Alternatively, employers tend to terminate or lay off workers to better manage total employment costs that includes cost of benefits while maintaining an adequate level of benefits for the remaining employees.”

Still, Elam said that shouldn’t be construed to mean that employers aren’t concerned with the cost of benefits. He said all employers, regardless of the current economic downturn, were already facing large major medical rate increases due to the continued upward spiral in medical and drug costs.

“Some of these rate increases may be as high as 30% to 50%,” he said. “In this instance, employers have been and will continue to make difficult choices in selecting what employee benefit levels can be afforded by both the corporation and also by the employee if the employee contributes to the cost of the medical plan. To offset these large rate increases, employers are already having to increase deductibles, co-pays, out-of-pocket maximums, reduce select benefits, and search for workable managed care solutions.”

Elam predicts small business are more likely to be affected by a downturn in the economy than large business primarily because of more restricted cash flow and less access to capital or loan markets during tough economic times. He notes another consideration is the U. S. tax code still significantly limits the deductibility of premiums paid by small businesses while allowing full deductibility of premium payments by large corporations.

“However, it is nearly impossible to hire in small or large businesses today if employee benefits are not furnished or available,” Elam said. “To that extent, we believe small business will keep their benefits and likely terminate employees to manage overall cost in lieu of cutting benefits.”

Allison Crews, vice president of Grogan & Crews Inc., Canton, said for most workers, benefits packages are a secondary consideration to keeping their jobs in a period where layoffs are becoming more common.

“When there is an economic downturn, employees of small and large companies wonder when their boss will ask them, ‘How long have you been here not counting tomorrow?’” Crews said. “We’ve just seen this with WorldCom. Benefits are secondary to this concern.”

Crews said cutting back on benefits often depends on local market conditions for small companies. Insurance and benefits packages can be designed to fit the company’s culture much like other benefits packages. In many ways, small companies can provide better benefits than larger ones if they remain flexible to the needs and concerns of their employees.

“For example, your key employee might like having his golden retriever at the office with him,” Crews said. “Or perhaps the company retreat could be shooting sporting clays, going deep sea fishing or a day trip to McCarty’s —rather than the golf course and beach routine. It all depends on what the employees consider rewarding.”

She also expects the trend for companies to offer voluntary benefits to continue because this enables employees to get coverage at often better rates than when they purchase benefits individually.

Marvin E. Stockett, CLU, president of Stockett & Thomas Agency, LLP, Jackson, said he doesn’t expect to see a significant number of companies dropping insurance coverages, particularly medical insurance, but it is probable that employers will be forced to reduce the level of benefits provided.

“This will be implemented in medical plans by raising deductibles, increasing co-insurance levels, limiting covered services, and passing on to the employee a larger portion of the cost of coverage,” Stockett said.

Stockett said retirement savings plans of the defined contribution type such as 401k plans and profit sharing plans where variable investments are used will be adversely affected in two ways:

• Reduced employer discretionary and matching contributions.

• Depressed equity-based investments (stocks, mutual funds, variable annuities, etc.) which will result in shrinking account values.

“Employees covered by defined benefit plans will not feel the effect as quickly since the retirement benefit is determined by formulas generally independent of investment returns,” Stockett said. “Defined benefit plans, however, depend largely on employer contributions and long-term average investment returns averaged over 15 years. An economic downturn affecting profitability will result in decreased ability by employers to adequately fund the plan if the downturn continues for a prolonged period. Similarly, investment returns may be depressed resulting in even higher required contributions. Other forms of benefit plans such as life insurance and disability income plans, split dollar plans, deferred compensation arrangements and various incentive bonus plans would ultimately be impacted as the length of the economic slowdown cycle continues.”

Not everyone sees economy continuing to weaken. Scott Naugle, vice president/ad-ministration/agency management, Stewart Sneed Hewes, Gulfport, said he believes things may start to look up soon. But if the downturn continues, he acknowledges that insurance coverage is one area that will be under scrutiny for cost reductions.

“Of course, in a labor market that remains tight, insurance and benefits are an important tool to retain skilled workers,” Naugle said. “These two opposing goals must be balanced. Businesses cut back, whether large or small, due to a variety of factors (cash reserves, regional economy, short term predictions of growth/shrinkage) and it is difficult to generalize in response to this broad question. Too many factors go into a decision to cut back or expand.”

Contact MBJ staff writer Becky Gillette at mullein@datasync.com or (228) 872-3457.


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