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Small Business Employee Benefits and HR Blog

Why Defined Contribution Helps Recruit and Retain the Best Employees

April 21, 2014
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Defined contribution health benefits are a valuable tool for recruiting and retaining the best employees - without the cost and complication of a group health insurance plan. defined_contribution_rectuiting_and_retention

Recruiting and retention is important to businesses of all shapes and sizes. That's because the cost of losing an employee is estimated at the equivalent of 6-9 months in salary - that’s $20,000 to $30,000 for a $40,000 manager in recruiting and training expenses, along with the potential lost revenue from customers. Others predict the cost is even more - that losing a salaried employee can cost as much as 2x their annual salary, especially for a highly-educated executive level employee.

Formal health benefits help recruit and retain the best employees

Health benefits are the number one fringe benefit offered by employers, and are an important part of employee recruiting and retention strategies. Many employers look at health benefits as an investment in employees. Employers can save approximately half of these expenses, $10,000 or more per replaced employee, with a health benefits plan that helps them recruit new employees and retain existing employees.

Defined contribution health benefits provide many advantages over traditional employer-sponsored benefits. Rather than paying the costs to provide a specific group health plan (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a defined contribution health plan that gives employers and employees full control over healthcare costs – the employer’s costs are predictable and controllable, while employees are given full control over their health care dollars and choose a portable plan that meets their exact personal needs.

How do defined contribution health benefits work?

An employer gives each employee a fixed dollar amount (a "defined contribution") that the employee may spend on an individual (personal) health insurance policy.

Under the traditional approach to health benefits, the company selects and funds the same insurance plan for all employees in a one-size-fits-all approach.

Alternatively, in a defined contribution approach, the employer designates a fixed amount of money, the “defined contribution”, and employees purchase personal health insurance directly from any insurance company they choose, selecting products that specifically meet their family’s needs and budget.

See this simple overview on how defined contribution works.

Different employees, different benefits

Providing different levels of benefits to classes of employees is at the core of benefits compensation and is routinely done by major corporations. With salary and other types of compensation, employers routinely compensate groups of employees differently. Field sales people are compensated differently than sales managers. Some employees get company cars, while others earn quarterly bonuses. Because health benefits are such an important part of compensation, why not provide benefits that vary by class of employee?

With defined contribution health benefits, businesses can create employee classes that offer benefits tailored to the company’s objectives, transforming a health benefit plan into a tool to find and keep great people.

For example, consider an electrical contracting company who struggled to hire and keep journeymen electricians in a very tight labor market. Instead of offering the same health plan to all employees, the company created separate classes for apprentices and journeymen and gave journeyman $350 more per month in their Defined Contribution allowance. This large increase helps the company reduce attrition among journeyman. Plus, it creates a visible incentive for apprentices to complete the education required to become journeymen.

As there are no minimum or maximum contribution requirements, a business can design their defined contribution health plan to fulfill its exact recruiting and retention needs.

Conclusion

Recruiting and retaining key employees is essential to every business, and a company's health benefit program is a key part of the compensation they offer to their employees. Due to the rising costs of traditional employer-sponsored health insurance, defined contribution health benefits are gaining popularity in the U.S.

Companies who thought they could not afford traditional group health insurance benefits (and therefore could not compete with larger companies for top talent), now have an affordable health benefits option for attracting and retaining employees.

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