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Control Benefit Costs with a Defined Contribution Plan

By Sam Nigro, president of Compass Benefit Advisors

If your business has moved from feeling like your benefit costs are escalating out of control to knowing they are, you are not alone. Many businesses today have expressed being close to the breaking point where the cost of providing benefits to employees is getting to be too much to bear.

One of the more common reasons for this burden is many businesses have allowed the “tail to wag the dog.” They have unknowingly used a common approach known as a Defined Benefit plan. This is where a business chooses the benefits it offers employees and budgets in the cost associated with those benefits. There are a number of challenges with this approach. Some of the more common are:

  • A Defined Benefit plan forces a business to accommodate the premium charged by the carrier.
  • To maintain employees’ current benefit levels, businesses are vulnerable to, often significant, increases by the carriers each renewal.
  • Employees have little control and often feel it is a “take it or leave it” situation.
  • A Defined Benefit plan may inadvertently create an entitlement environment with certain employees, while not meeting the needs of other employees.

So how do businesses improve the situation? One way is to move from a Defined Benefit plan to a Defined Contribution plan. In a Defined Contribution plan the business establishes a budget for its benefits, defines the amount of money employees will receive as a subsidy, and offers a variety of benefits for employees to choose from. Some of the benefits of this approach are:

  • A Defined Contribution shifts the control of the cost back to the business.
  • Businesses can adjust and budget the cost of the benefits each year, thus obtaining more-predictable outcomes.
  • Employers can tailor the benefits package to meet the needs of their employees.
  • A Defined Contribution plan gives employees a sense of involvement and control.

In such uncertain and challenging economic times, it is very important for businesses to attract, retain, and reward valued employees. Thus, having a benefit package to meet the needs of both the business and the employees is critical. A Defined Contribution is just one of the ways to control benefit costs. Take time to visit with your benefit consultant to determine which plan is the best fit for your business.