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A new total rewards strategy allows employees to select specific benefits that accommodate their lifestyle.

By Craig Dolezal

Organizations are facing an unprecedented shift in the makeup of the workforce that is changing the way employers are thinking about their benefits programs. This has happened before, and organizations have risen to the challenge. Take, for example, employer-sponsored health insurance programs were introduced to the market due to post-WWII wage controls and a need to hire and retain employees in a growing economy with rewards that went beyond cash compensation.

In today’s market, the cost of benefits and rewards are continuing to go up. As benefits fees continue to outpace wage increases, benefits will eat up nearly half of total compensation spend by 2024. In spite of the increasing spend, employees don’t really see any differentiation in the rewards their employers provide. In fact, the majority of respondents to Aon Hewitt’s 2016 Workforce Mindset study said that when they compare their rewards to those offered by other employers, nothing really stands out.

At the same time, employee expectations around rewards vary as a result of changing workforce dynamics. For example, baby boomers, who are beginning to exit the workforce, seek benefits that foster health and wellness, and place more value on money. On the other hand, Millennials, who will comprise approximately 75 percent of the workforce by 2025, place value on creative benefits and meaningful work. In fact, a recent MetLife study revealed that 80 percent of employees want personalized benefits geared to their individual circumstances and age.

These shifts expand expectations around the role employers should play. For healthcare, employees look to their organizations to provide ways to help them get and stay healthy. From a financial perspective, organizations now need to deliver approaches and tools to help employees manage their wealth.

Employers are interested in offering more flexibility in rewards to better align with this increasingly diverse set of workforce expectations. They are rethinking their one-size-fits-all benefits programs in a broader total rewards context.

Organizations are rethinking a one-size-fits-all benefits program in order to offer more flexibility and rewards that are better aligned with this increasingly diverse set of workforce expectations. In fact, Aon’s research shows that approximately 70 percent of employers believe that total rewards strategies will be leveraged by organizations by the end of the decade in order to accommodate the evolving workforce.

Total rewards marketplaces aim to meet these demands by offering a variety of different benefits and programs that span across health and wellbeing. This can include health insurance, 401(k) plans, and tuition reimbursement. Employees receive a fixed amount of money as part of their benefits offering and they choose how they want to allocate their employer’s contribution. For example, in addition to health insurance, a Generation Y worker may elect a 6 percent contribution to their 401(k) plan, and allocate other funding toward paid parental leave and paid time off. On the other hand, a baby boomer may choose a 15 percent contribution to their 401(k) plan, plus allocate funding toward long-term care insurance and care planning services.

There are a number of considerations and questions that employers need to address when implementing a compliant and compelling total rewards marketplace. These include:

1. Potential cost reallocation. Since a large portion of benefits spend is related to healthcare, it may be necessary to redesign the plans and allocate some of the “savings” toward credits that can be used for flexible reward elections.

2. Eligible groups. Organizations need to consider if there are certain groups of employees or participants that will not be eligible for the flexible rewards program or some of its components.

3. Core benefits. Employers will need to select a group of core and mandatory benefits.

4. Retirement. Organizations will need to consider if retirement benefits should be included as part of the flexible rewards design. Compliance and discrimination issues will need to be evaluated and taken into account.

5. Credit methodology. A formula or methodology should be used to allocate credits to individual employees. Organizations need to consider if employees with dependents will be entitled for a larger credit allocation and if it will vary by pay.

6. Medical. Medical opt-outs need to be handled consistently with possible opt-out credits, implied costs, and excess credits.

7. Section 125 Cafeteria Rules. Many of the before-tax benefits will be subject to the rules governing Section 125 plans.

Total rewards marketplaces are still new and emerging concepts. Today, the interest and demand are ahead of the infrastructure necessary to effectively deliver a fully formed total rewards program. This is primarily because the emerging workforce and its needs are just being fully realized, and traditional benefits programs and delivery systems are still geared to the past.

To change the benefits game and enable the total rewards concept to take off, the industry must first continue to build and enhance administrative systems that would enable employers to design programs that offer a broader menu of flexible rewards programs.

Organizations that can create the right combination of culture and personally relevant total rewards that meet the needs of their current and future workforce will have a distinct advantage in attracting and retaining high-performing and engaged employees.

Craig Dolezal is senior vice president of Aon Hewitt.

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