Top 5 Reasons Employers are Switching to Defined Contribution Plans (DCPs)

Written by: Christina Merhar
Originally published on May 5, 2014. Last updated December 7, 2022.

New research indicates that nearly half (47%) of U.S. employers have reported they are moving or have moved to a Defined Contribution Plan (DCP) model for healthcare benefits. 

Here's what Prudential's annual study revealed about employers' plans to switch to DCPs... the top five reasons employers are switching to DCPs.Top_5_Reasons_for_DCPs

Top 5 Reasons for Defined Contribution Plans (DCPs)

1. Lower healthcare costs for the employer

Not surprisingly, the top reason behind the switch to DCPs is financially motivated. Prudential's annual study of employer health benefits found that more than half (59%) of surveyed employers reported switching to a DCP to lower healthcare costs.

Employers consistently report concern over unpredictable, rising healthcare costs both pre and post- ACA legislation. DCPs allow employers the opportunity to contribute a pre-determined amount of money towards an employee’s health benefits plan, allowing the employee to shop around for competitive and customized plans of their choosing.

2. Offer employees more plan choices

Because the DCP model shifts plan selection from the employer to the employee, it offers employees more choices in how their healthcare benefit dollars are spent.

Prudential's research found giving employees more choice was the second most popular reason listed among employers for switching to DCPs (40%).

Health plans are not one-size fits all, so by setting aside a definitive amount of money for employees to shop around for a plan that suits them best, they ultimately have more say and more control.

As such, the research suggests that carriers and brokers have an opportunity to increase employee awareness and educational efforts in order to help ensure employees fully appreciate and understand the options available to them. Employers with a DCP can help this process by making a health insurance broker available to employees to help them select plan(s).

3. Lower healthcare costs for employees

In today's workforce it's not just the employer who pays part of the premium cost -- it's employees too (especially for family coverage). On average, individual health plans costs less than traditional group plans and new premium tax credits are available to qualifying employees to lower their out-of-pocket costs even more.

Because individual health plans cost less, the employer's contribution goes farther and employees can save on the cost of healthcare, too.

See: A Real-Life Example - Defined Contribution & Health Insurance Subsidies

4. Get out of the health insurance business

As mentioned in #2, DCPs shift the plan selection from the employer to employee. For many employers, getting out of the business of selecting and purchasing health insurance is a motivator for adopting DCPs. Getting out of the health insurance business means not spending valuable time on renewals, plan selection, claim disputes, or time-consuming plan administration. 

5. A win for brokers, too

For health insurance brokers, DCPs provide a solution to increase individual health insurance policy sales, voluntary policy sales, and retain clients who are canceling group health insurance (or who have never been able to afford a group health insurance plan but want to offer health benefits). 

According to Prudential's research, 47% of surveyed brokers believe employees will spend more on health care benefits, while at the same time employers will add voluntary coverage.

Have a Question? Leave a comment below.

Originally published on May 5, 2014. Last updated December 7, 2022.


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