1. Financial Wellness Program
As a business owner, you’re constantly looking to add value. You invest in innovation. You utilize models of efficiency. You follow best practices. But have you invested in employee financial wellness, specifically employee financial education? If not, you may be missing an important opportunity to add value.
You may already realize some of your employees struggle with financial stress. In MassMutual’s 2017 Small Business Employee Financial Wellness study, business owners said they believed only a slight majority of their employees—55 percent—were good at managing their own money, and only 45 percent could manage a financial setback.1
Offering professional, objective employee financial education provides business owners with a non-intrusive, but concrete way to help employees manage their day-to-day financial well-being. In turn, employee financial education can yield tangible business results, including:
- Increasing productivity and workplace engagement. According to MassMutual’s employee financial wellness study, 74 percent of small business owners said employee financial well-being plays a significant role in workforce morale and productivity. Additionally, 56 percent of business owners said productivity levels would increase significantly if employee financial stress were not always “a source of anxiety and distraction.” Independent studies back this up: A 2017 PwC survey found that 46 percent of employees distracted by financial stress reported spending three hours or more each workweek dealing with personal financial issues.3 Reducing employee distraction can help to boost both morale and productivity.
- Attracting and retaining top talent. With nationwide unemployment rates the lowest they been in years, attracting and keeping high-quality workers is a real challenge. Today’s new hires expect more in terms of work-life balance and look for benefits to help achieve those objectives. Millennials in particular are open to employee financial education, according to a 2017 MassMutual Workplace Benefits study: 70 percent would welcome financial planning services and 60 percent are interested in budgeting assistance.4 Financial education shows employees you care and may help employees feel valued, encouraging longevity. Nearly half of employees surveyed would welcome additional help or guidance on personal finances from their employer, with 51 percent expressing a desire for more employer education about saving for retirement.
- Complementing existing employee benefits. Employee financial education can also help employees get the most out of the benefits you already make available to them. Learning how to budget or understand asset allocation will help employees better utilize retirement plans, such as 401(k) benefits. Employee financial education may also bolster the health benefits you offer and help your employees use them more efficiently. For example, you may offer health savings accounts, but do your employees know how they work, how to maximize the benefits they provide, and the important role they play in addressing future healthcare costs in their retirement?
Employee financial education is more than a cool workforce perk, like gym memberships or company outings. It’s an integral part of an overall financial wellness strategy for your business. Offering employee financial education is the smart thing to do, for your employees and for your business. It’s an opportunity to add value that can strengthen many aspects of your business.
2. Employer-Paid Disability Income Insurance
The "income gap"
Group long-term disability insurance (GLTD) offered through your company can be a valuable employee benefit. Many employees have come to expect their company to offer GLTD, and it is important to meet their expectations. Indeed, the Insurance Information Institute suggests that more than half of large and mid-sized companies offer such benefits to their workers.
But a GLTD policy usually comes with limitations. For example, the plan may only cover 60 percent of an employee’s base salary (bonuses and commissions are often excluded), have monthly caps, and the benefits paid may be subject to income tax. These factors all contribute to what is called the income gap — the difference between an employee’s pre-disability income and his or her net GLTD benefits.
The income gap can become larger for employees who earn high salaries. Due to the plan’s monthly benefit cap, high earners can receive significantly less than 60 percent of their salary if they become disabled. (Calculator: The value of key employees)
To quickly determine which of your employees may be adversely affected, simply double the GLTD’s monthly cap, and add a zero.
$5,000 (monthly cap) x 2 = $10,000. Add a zero = $100,000. For an employee who earns more than $100,000 per year, GLTD may provide less than the traditional 60 percent coverage.
With the formula above in mind, look at your company’s high earners. How will they, and their families, fare financially in the event of a disability?
3. Non-Qualified Deferred Compensation Programs
After a tumultuous year, where new precedent was established around tax-qualified and ERISA plans, employees’ concerns about future deferred compensation benefits are real.
Corporate-owned life insurance (COLI) is a common type of asset earmarked for this purpose. The tax-deferred nature of COLI mirrors the tax features of NQDC plans and is an efficient asset accumulation strategy, particularly in a rising income-tax rate environment. Further, employees’ concerns can be directly addressed by holding COLI in a “Rabbi” trust, protecting those assets from being used for any other purpose.2 Businesses should work with their legal and tax counsel to determine the specific needs of the business.
Altogether, the use of COLI now may be more appealing and valuable than ever before. Often, COLI policies can enable companies to offer benefits that they might otherwise be unable to provide and is a highly effective way to help top talent prepare for and enter retirement. While assets do not need to be set aside to meet NQDC obligations, doing so enables businesses to responsibly make the most of their investment in their highly valued employees.
COLI policies are widely available from life insurance carriers but the long-term nature of NQDC benefits makes selecting a company with strong financial ratings critical. It pays to choose a company with among the highest ratings available from independent rating agencies such as A.M. Best, Standard & Poor’s, Fitch Ratings and Moody’s Investors Service.
Making use of COLI policies as a deferred compensation informal funding vehicle has become commonplace as companies compete harder than ever to attract and retain top talent. Companies that secure coverage can potentially provide themselves with a competitive edge as they grow and prosper.
4. Executive Bonus Plans
You’ve found the perfect person for a key position in your business. Now, how do you put together a compensation package attractive enough to close the deal? (Calculator: The cost of losing a key employee)
Ideally, one that goes above and beyond the usual offerings, but that isn’t too hard on your bottom line? One program worth looking at is an executive bonus plan (sometimes called a Section 162 Plan).
How an executive bonus plan works
An executive bonus plan is a way to attract, retain and reward key employees using life insurance. Here’s how it works: The employer takes out a life insurance policy on a key employee. Sometimes it’s a term policy, meaning that the policy is only in effect for a set period of time, and doesn’t build cash value. Usually, though, it’s a permanent policy (either whole life or universal) that accrues value over time.
The employee is the owner of the policy and gets to determine the beneficiaries and manage the funds within the policy. The employer covers the cost of the policy by periodically giving the employee a bonus big enough to pay the policy premiums. The employee then pays the premiums to the insurance carrier.
When the employee reaches retirement age — or sooner, depending on how the arrangement is set up — they can access the cash value of the policy for extra income if they want. If the employee dies, the death benefit of the policy would go to their family or other named beneficiaries.1
Set it up the way you want
One nice thing about an executive bonus plan is that it can be structured in a number of different ways, depending on what makes the most sense for your company and what your goals are with regard to the key employee. A financial professional can tell you more about the various options, but here are a few examples:
Reward the key employee for their loyalty: You can set up a vesting arrangement, restricting their access to the cash value of the policy until predetermined dates, or until they reach retirement. So the plan becomes a form of “golden handcuffs,” designed to keep the employee working at your company for as long as possible.
Tie the plan to performance: If the employee doesn’t achieve certain goals or benchmarks, you can decrease or withhold the bonus amount.
“Double bonus” the employee: The bonus you pay the employee is considered taxable income, so if you’re feeling extra generous, you can bonus them enough to cover both the premium and any taxes they’ll owe.
What’s in it for you?
Because you’re bonusing the employee to cover the insurance policy premiums instead of paying the insurance carrier directly, the bonus amount is generally considered “reasonable compensation.” So it’s tax-deductible, just like a straight-up cash bonus would be, but what you’re providing has greater long-term value to the employee.
The only major downside to an insurance-based executive bonus plan is that when the employee leaves the company, the policy goes with him or her. You’re no longer obligated to pay the premiums, of course, but you also don’t recoup any of the value of the policy you’ve been paying for.
And, of course, it’s worth keeping in mind that an executive bonus plan isn’t going to be the perfect fit in every situation. The person you’re trying to woo has to want life insurance in the first place.
Add it to your compensation toolbox
Reeling in and keeping a key employee can yield major returns for your business. But different employees are lured by different kinds of rewards, depending on their personal and financial circumstances. A Section 162 Executive bonus plan is a simple, flexible strategy to have in your back pocket in case the right candidate for it comes along.
5. Employer Sponsored Retirement Plans
Companies like Google and Uber have told employees they can work remotely through 2021, and as more corporations embrace the work from home lifestyle accelerated by the global pandemic, quirky office perks no longer seem fashionable. Many will have to increase or alter their benefits packages in order to attract, and retain, top talent.
A Glassdoor survey revealed that four in five employees would prefer new or additional benefits over a pay raise. More specifically, 89% of younger employees, those between 18 and 34, would prefer benefits to more money in their paycheck.
While increased health-care insurance was the most valued benefit (40%), retirement plan and/or pension ranked fifth, at 31%. Flexible scheduling — which has become the norm for many in the current work from home environment — followed retirement savings, at 30%.
A company’s success can be tied directly to the quality of its employees. While ping pong tables collect dust in empty offices, firms need to show employees that they are invested in them. “Employees who feel their employer is invested in them are more likely to be engaged in their workplace and stay with the company longer, reducing the high cost of employee turnover,” Roger Lee, the founder of Human Interest, a San Francisco-based 401(k) provider, recently wrote.
Focus on retirement benefits isn’t new, or only for employees at large corporations. A study conducted by Environics Research Group in 2012 found that 92% of employees at small- to mid-sized companies ranked “workplace savings and retirement plans” as an important factor in remaining with their employer.
Not only do retirement plans make companies more appealing to applicants, but they can also improve the morale of current staffers. According to a survey by Willis Tower Watson, 75% of new hires at a company offering a 401(k) say that a retirement plan provides a compelling reason to stay. Office perks, promotions, and raises may benefit some, but a company retirement plan may be a more equitable solution for the whole company.
Simply offering a retirement plan will not be enough, according to Lee. He argues that retirement plans, specifically 401(k)s, should offer immediate eligibility, lost-cost options, and employer match or contributions. Immediate enrollment would allow employees to contribute right away, instead of having to wait, receiving the full value of their benefit. Low fees would allow employees to keep more of their earnings.
A National Compensation Survey found 41% of employers match a percentage of employee contributions, with the top-end of the range at 6%. According to the Bureau of Labor Statistics, the average 401(k) match is 3.5%.