‘What the heck is defined contribution?’

I was on a road trip recently with a few friends, none of them having any direct ties to the health insurance or benefits administration industry. On hour eight of said road trip we were all a bit slap-happy, so I decided to do some market research on my friends and ask them what it means when I say, “insurance coverage and defined contribution.” After some razzing about my overall geekiness, one of my friends exclaimed, “What the heck is defined contribution?”

Excellent question. To those of us who spend our days in positions related to benefits and insurance, this may be relatively easy to answer. But what about everyone else? I suspect most people out there are asking the same question that my friends posed on our road trip.

With a defined contribution approach, employees receive a fixed dollar amount from their employers to apply toward the purchase of health insurance via an online marketplace, or exchange. This strategy helps employers contain costs while giving employees a retail shopping experience that features a variety of plans to choose from.

According to the 2014 bswift Benefits Study, defined contribution strategies are under consideration by some early adopters: 18% for the 2015 planning season, up from 14% in 2014. However, very few employers actually adopted it — less than 1% in 2014 — and bswift expects modest change for Jan. 1, 2015, too. Furthermore, most employers are only considering a defined contribution approach for their medical insurance offerings, a very limited application of such a wide-reaching benefits strategy.

Why are employers slow to adopt a defined contribution strategy? I believe there are many different reasons. Change is scary. Just like the advent of high-deductible health plans, defined contribution strategies require a different way of thinking and acting. This, in turn, requires effective communication strategies. Not only do you have to get buy-in from senior management when considering defined contribution, but you also have to consider your employee population and how best to communicate to them.

Finally, and most challenging, is trust—and believing that a defined contribution strategy can help bring about positive change in the way employees buy employer-sponsored health coverage.

Are your clients considering a defined contribution strategy? If so, what questions do they have about making the transition? Let us know in the comments section below.

Petro is client relationship manager at bswift.