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Eager to get workers off the payroll, employers consider boosting retirement benefits.
David M. Katz, CFO.com | US
November 5, 2001
What a difference a few months make.
Until recently, most employers were doing everything they could to keep skilled employees on the payroll. With a tight labor market, and with prized workers jumping from job to job, it made a lot more sense to try to hold onto valuable employees than replace them. Toward that end, many businesses offered an expanded package of benefits, including better medical plans, bigger 401(k) contributions, and more vacation days.
Today that strategy has changed dramatically. Suddenly, with revenues shrinking and with a recession looming, employers are doing everything they can to convince employees to leave. Ironically, though, the approach to losing workers is the same as it was for retaining workers: Offer attractive benefits. As some employers have discovered, better retiree health-care coverage can be particularly attractive to workers in their mid to late 50s. Workers in that age group often qualify for early retirement but are well short of age 65 — when Medicare benefits kick in.
Indeed, benefit consultants say employers now seem keenly aware of how benefits can help reduce labor costs. Retiree health-care benefits "are important in terms of managing the workforce," insists Frank McArdle, a principal with Hewitt Associates in Washington. "They can increase the willingness of people to retire." Conversely, if employees know that medical coverage won't be available when they retire, McArdle says they're more likely to stay on the job, and "that may not be optimum where there's a need for downsizing."
Gold Watch, Free Oranase
That need has been very much on the minds of executives at National Semiconductor. In its latest round of layoffs, the company eliminated an additional 1,000 jobs in May. That's about 10 percent of the workforce at the microchip maker.
Even with those layoffs, executives at the Santa-Clara, California-based company are looking for other ways to pare payroll. To convince workers to take early retirement, management is considering offering some form of retiree health coverage — a first for National Semiconductor. One option under consideration: Employees leaving the company could take their health and dental benefits along with them. While the company wouldn't pay for the portable coverage, the new retirees would qualify for a group rate.
Eugene Kiernan, National Semiconductor's director of risk management and insurance, concedes that plan participants would pay a lot more for healthcare as retirees than as employees. Currently, National Semiconductor picks up 87 percent of the premium for full-time workers. Still, he points out, coverage would be cheaper than retirees could get on their own, and no physical exams would be required. For the first 18 months, the plan would mirror the deal departing workers would get under the Consolidated Omnibus Budget Reconciliation Act (COBRA). (Under COBRA, during that period, former employees can buy coverage for 102 percent of the cost of coverage for active workers.) Kiernan says the price would rise to a market-based, nongroup rate after the 18 months. Early retirees with ongoing medical conditions would benefit by staying in the plan until age 65 because their coverage for pre-existing conditions wouldn't be limited — as it could be if they chose to buy their own policies.
National Semiconductor executives are also pondering the possibility of providing coverage for prescription drugs to retirees over 65. Coverage could be limited to generic drugs when possible, or to those on a preset list, known as a "formulary." Even so, the benefit could prove a powerful incentive, since Medicare doesn't pay for prescription drugs.
Still, Kiernan notes, the company isn't ready to assume that sort of potential liability just yet. At the same time, he concedes that the obligation might not be open-ended — particularly if the federal government expands Medicare to include drug coverage. But in the aftermath of the September 11 terrorist attacks, the administration's push for free prescription drugs for seniors may wind up on the back burner. (See "The War on Drug Costs.")
Keeping Their Caps On
Few employers, however, are even considering adding new benefits. In fact, many U.S. corporations now reaching retiree spending caps they set years earlier are looking to get retirees to share the burden of medical inflation.
As you may recall, many companies established those caps after the Financial Accounting Standards Board issued Statement No. 106 ("Employers' Accounting for Postretirement Benefits Other Than Pensions") back in 1992. The statement required employers to recognize their estimated future liabilities for retiree health benefits — as well as their actual outlays — on their financial statements. Benefits experts say FAS 106 got many employers thinking about the real costs of their long-term benefit plans.
Currently, about 40 percent of large companies have caps on spending on retiree health benefits, says Hewitt's McArdle. According to a Towers Perrin survey of 30 employers with such limits, half of the respondents said they could lift the caps — but have chosen not to do so. In other words, those managers expect their existing retirees to foot the bill for medical inflation. Many other companies are also considering eliminating benefits for future retirees, consultants say.
Such surveys aren't likely to have workers signing up for early retirement. Of course, notes Hewitt's McArdle, many companies are locked into their current obligations to former employees by collective-bargaining agreements. And most courts have ruled that employers can cut coverage only if they've reserved that right in their plan documents or in union contracts.
Even then, a business that substantially slashes benefits is courting a class-action lawsuit — not to mention a public relations nightmare. Polaroid, for instance, which filed for Chapter 11 protection on October 12, has taken a beating in the media for cutbacks in retiree health coverage.
Fear of similar entanglements has kept some companies from doing much of anything with their retiree medical plans — no matter what the price tag. "Things don't change that quickly with retiree health," says Paul Fronstin, a senior research associate with the Employee Benefit Research Institute in Washington. Employers, he notes, are more likely to cut costs by laying people off than by cutting existing benefit plans. Says Fronstin, "You've still got to live with the people that are working for you."