Flex plans gain in popularity

More organizations are using flexible benefit plans to contain cost increases and adapt to changing demographics

By Paul Stephens

*This is an expanded version of a summary originally published in the January-February 2010 issue of CAmagazine.

Many flexible benefit plans – programs that enable employees to make choices about how some of their employer’s benefit expenditures are spent – are undergoing a facelift to respond to a changing economic and demographic climate, according to a recent survey by Hewitt Associates.

Of the 211 organizations from across the country that responded to Hewitt's Flexible Benefits in Canada 2009 survey, 60% offer a benefits plan with a flexible component, up from 41% in 2005 when Hewitt last conducted this survey. Three-quarters of those that have flex plans said these programs are meeting or exceeding their expectations in terms of the top three advantages they identified: meeting diverse employee needs, containing rising benefit costs, and improving employee recruitment and retention.

Increased flexibility
Flexible benefit plans naturally lend themselves to changing times, given that adding or adapting benefits can be done more quickly and efficiently than is the case with traditional programs. As a result, certain new trends that reflect shifting needs are becoming apparent in “flex” plans:

A focus on employee health – as corporate wellness strategies have grown and become more refined, organizational flex plans have been aligned to these strategies. Wellness credits, personal wellness accounts, medical exams and health club memberships are all on the rise.
Flex has grown and matured into an important component of total rewards with 94% of respondents saying they view benefits as having some degree of linkage to total rewards. Corporations are looking for ways to keep flex relevant to employees and provide meaningful levels of credits with which to make selections. This has given rise to flex plans linked to financial security benefits and variable compensation. For example, the survey results show that defined-contribution pension plans, RRSPs, TFSAs, and financial/tax counseling are all gaining ground with some organizations.
A growing emphasis on corporate social responsibility has prompted almost half of employers to facilitate charitable contributions through their benefit programs.
A demand for greater work-life balance from workers of all ages has resulted in increased incidence of vacation buying (included in 28% of plans) and sabbaticals (40% of employers either provide such leaves or expect to do so in the next three years). Note, however, that vacation selling is also offered by 18% of employers.

As flexible benefit programs become more prevalent, employers can no longer rely on the basic structure as a differentiator to attract and retain employees. The most forward-thinking employers are taking flexible benefits to the next level and there is a real demand for new, fresh ideas. One area that is receiving increased attention in the UK that may eventually make its way to Canada is “green” initiatives. Many employees in the UK have the opportunity to purchase bicycles for bike-to-work commuter programs, obtain a discount on public transportation, and receive a price cut on low-emission cars.

Flexible funding
Funding for flex choices is generally achieved through pre-flex employer contributions for benefits (45%) and adding extra financing from the company (43%).

Despite pre-flex employer contributions registering as the most common funding method, the percentage of employers using this approach fell from 53% in 2005 – when Hewitt last conducted a flexible benefits survey – to 45% in 2009. This drop is countered by a slight increase in non-standard funding methods, like opting out or down on benefits (e.g., reducing vacation entitlement to create funding for flex choices) or using employee contributions (e.g., reducing salary to create funding).

Even though 61% of employers cited containing benefit cost increases as one of the advantages of flex plans, most continue to shoulder the bulk of rising costs. Almost a third foot the entire bill for medical and dental cost increases. However, almost two-thirds also look to employees to pay for between 25% and 50% of these increases.

Taking advantage of technology
Flexible benefit programs are not without their challenges for employers. No matter where organizations are located, communication and administration are consistently identified as major issues: Hewitt’s 2009 flexible benefit surveys in the UK, Canada and Mexico all attest to this fact. However, at least in Canada, communication is becoming less of a concern. In 2005, 22% of employers identified employee communication as the major obstacle to implementing flex; that figure dropped to 17% in 2009. Coincident with this drop has been an increase in the use of electronic communication. Four years ago, 56% of employers provided employees with printed coverage summaries on enrolment; now only 22% provide that information in hard copy.

The complexity of administering flex plans remains a challenge. In 2005, 79% of survey respondents (regardless of whether they offered flex) identified administration as one of their top three concerns about a flexible benefits plan. By 2009, there had been a decrease in that figure to 73%. During the same period, the percentage of organizations with flex that outsourced administration to a third-party administrator or an insurance company increased from 48% to 61%. Presumably, outsourcing has helped to address administrative challenges.

The success of a flexible benefits program in meeting the needs of employers and employees is not necessarily tied to incorporating leading-edge benefits. More important is a carefully considered approach to design, communication and delivery – preferably determined with employee input – with well-defined objectives and measures of success. More than ever, the advantages of flexible benefits provide a compelling business case for implementing and maintaining these programs. The challenge for employers is to maximize their effectiveness and continue to innovate.

Paul Stephens is a senior benefits consultant in Hewitt’s Vancouver office: paul.stephens@hewitt.com