A Very Brief History of Employee Benefits

Group Benefits Space and Innovation

By some accounts, workplace-related benefits started at the beginning of the nineteenth century with unions and mutual aid societies. The idea was to protect group members and families against hardships that come with sickness, injuries, and the death of the primary breadwinner. However, it's worth noting that these policies didn't cover medical expenses; instead, they provided payments to compensate for lost income. Essentially, these were early versions of life and disability insurance. Part of the reason was that few effective medical treatment options were available. It's a depressing thought in today's world, but that was how it was back then. The evolution of medical insurance is a fascinating story; I won't go into those details in this article, but if you are interested, please refer to the articles listed at the end.

A significant milestone in the US was the inaction of the 1932 National Labor Relations Act, which made health benefits a mandatory issue for collective bargaining. But the key turning point was during the World War 2. To beat the supply and wage constraints, US employers started offering benefits like health plans to attract and retain workers. A suite of regulations followed to provide additional tax benefits to employers for these benefits and reimbursements. The US is now unique among developed nations in its reliance on employer-provided health care, which places considerable strain on the self-employed, individuals in transition, and those wanting to change employers while constrained by their current coverage.

Pension and retirement savings evolved in the 1900s as well. It's hard to believe, but in 1900, the average life expectancy was only around thirty years, with family support as the primary sustenance for those who lived longer. The life expectancy is now close to eighty years, and the family composition, norms, and expectations have changed tremendously. Along the way, as things evolved, employers started providing pension plans. The first private pension plan began in 1875 when American Express started offering a significant percentage of last year's salary as a pension to retirees. The tax regulations and infrastructure also evolved here, and the adoption of pension plans (defined benefits) grew. However, regulations also were behind the decline in defined benefit plans. In 1980, about 60% of Americans had access to pension plans, but as of 2022, only 14% did. The pension plans were replaced by 401(k), the defined contribution plans. Jury is still out on the efficacy of these plans for retirement readiness.

When I began working in the early 2000s, pension plans were already a thing of the past, but employers typically provided rich benefit plans. I had health insurance with zero premiums and zero co-pay. The other typical benefits like life insurance and disability benefits were available, but the focus, as it is today, was on health insurance. Since then, along with the reduction in number of DB plans, the benefits have progressively become less wealthy. The rising cost of health care led employers to shift the costs to employees. To alleviate the burden on employees, employers started offering new employee-paid benefits that reimburse medical expenses in case of events like critical illness and accidents.

The industry structure for employer-provided benefits is complex and hasn't kept pace with the other industries. The selection and delivery of benefits involves consultants, brokers, TPAs, and many other third parties. Due to this fragmented value chain, providers have limited access to data, often lacking information on the insured and even complete billing details. The industry structure also makes it difficult to drive innovation in terms of products and delivery. Furthermore, employees frequently remain unaware of the companies offering ancillary benefits like life and disability insurance. Enrollment for benefit plans typically occurs annually, even though the product may not have adverse selection issues.

However, innovative companies are emerging to address the unmet needs of both employers and employees. For instance, recent years have seen the introduction of wellness-related offerings. Numerous research studies and surveys have indicated that employees seek financial, physical, and mental assistance, turning to employers for support. Innovative solutions have surfaced, targeting various employee pain points—some focusing on behavioral aspects while others provide tools for plan implementation. Nevertheless, in the age of tight budgets and a fluid labor market, employer adoption and employee engagement are ongoing challenges exacerbated further by current economic uncertainties.

Over the coming months, I will showcase some pioneering companies to highlight the employee and employer needs being addressed, but more importantly, the innovative nature of some of the new offerings. In addition, I will work with the companies to highlight some of the proof points that they have been able to generate.

Stay tuned!

References:

>https://www.ncbi.nlm.nih.gov/books/NBK235989/

> https://www.fastcompany.com/90320349/your-employee-benefits-were-400-years-in-the-making

> https://newsroom.bankofamerica.com/content/newsroom/press-releases/2022/09/bank-of-america-study-finds-84--of-employers-now-say-offering-fi.html

> https://www.ncbi.nlm.nih.gov/books/NBK235989/

> https://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html