By Brett Haugh, Employee Benefit Solutions
Balancing the need to control benefit plan costs and the need to provide value to employees is a challenge. In times of uncertainty, the struggle to balance objectives is even more difficult. Today, there are several variables that create uncertainty in the worlds of business and benefit plans:
- Drilling contractors are paying more attention to costs due to low commodity prices and overall economic uncertainty.
- Employees perceive benefits, especially healthcare and retirement, as an important part of total compensation.
- Employees and businesses are uncertain about President Obama’s efforts to reform the healthcare industry.
- Reductions in the workforce have employees very nervous and unsure if they will have company-provided healthcare next month. Nervousness about changes in the workforce creates higher-than-expected utilization of benefits, which impacts benefit plan costs. Some of these costs will not begin to surface until the middle part of 2009 or beyond.
Benchmarking the performance (cost and coverage levels) of your benefits program is an effective exercise that should be part of any annual planning process. A company needs to know where it stands in relation to others before it charts a course for change.
Employee Benefit Solutions (EBS) published the 4th annual edition of its Drilling Industry Benefit Plan Survey on 21 May. It caters exclusively to drilling contractors, which means the results are not skewed by exploration and production, midstream or other sectors in the energy industry.
Median values for PPO medical plans
for the drilling contractor industry.
With significant input from survey participants, EBS has developed an online survey tool to capture data that ensures the timely accumulation of accurate information, while maintaining the confidentiality of individual participants and safeguarding the data.
Twenty of the drilling industry’s onshore and offshore companies participated in the 2009 survey, representing a fair cross-section of the industry:
- 10 companies report operations onshore:
o Seven of the 10 operate exclusively onshore.
o Two operate onshore and offshore in shallow water (<4,500 ft).
o One operates onshore and offshore (shallow and deepwater).
- 10 companies report operations exclusively offshore:
o Seven focus on shallow and deepwater combined.
o Two focus on shallow water only.
o One focuses on deepwater exclusively.
The survey is broad and captures data points specific to coverage, costs and cost-sharing across healthcare (medical, dental, pharmacy and vision), retirement, life, accident, disability and paid time off (vacation and holidays) for hourly and salaried employees.
The results are distributed exclusively to participants and provide insightful data points worthy of consideration when planning for 2010 annual enrollment.
Across the 20 companies, the survey measured 33 unique medical plan options. Approximately 85%, or 28 medical plans, are preferred provider organizations (PPOs). The PPO medical plan coverage differs when comparing onshore companies to offshore. Offshore coverage does not differ when comparing deepwater to shallow water.
Costs and cost sharing
The average annual PPO medical plan costs reported across all participants (onshore and offshore) increased 7.1%; onshore increased 3.0% and offshore increased 7.5%. These results appear to be consistent with the rate of medical plan increases that EBS has observed in general industry surveys conducted across the country.
Since demographics (age and gender) play a significant role in the cost of healthcare, we are concerned about the potential for the drilling industry’s future medical plan cost increases to exceed the normative results in the general industry. On average, the typical drilling company employee is male and approximately age 50. In general, employees with these population characteristics tend to utilize the medical plan more frequently and in a higher cost setting (acute hospital inpatient versus minor outpatient).
The monthly contribution or payroll deduction for the employee’s participation in the medical plan has a significant impact on the employee’s perception of value of the benefits and the company’s ability to attract and retain employees. We observe a difference between contributions made by employees who work onshore and those who work offshore. While contributions may not be as important to salaried employees, hourly or lower-paid employees do recognize the significance of their payroll deductions.
The average annual PPO cost, per employee
per year, according to the EBS survey.
While three of the 20 survey participants indicated that they continue to offer a defined benefit pension plan to active employees, defined contribution or 401(k) plans remain the most prevalent type of plan used by drilling contractors. EBS observes that the industry’s adoption of 401(k) plans is consistent with what has been adopted by other industries across the United States. Next to healthcare, retirement is the most highly appreciated benefit plan within a well-designed program.
The 2009 survey results show that there is a wide array of 401(k) plan designs that vary by the amount the employer contributes to the plan and the method by which employees may contribute.
Almost all companies that have 401(k) plans match contributions made by their employees, with the percentage matched ranging from 2.5% to 15%, and the average matching percentage being 5.5%. Twelve companies reported matching contribution percentages of between 4% and 6%. Only five companies reported making non-matching profit-sharing contributions, ranging between 3% and 10%.
Beginning in late 2008, employers nationwide began reporting cutbacks or suspensions of their companies’ 401(k) contributions. In contrast, only one of the survey participants reported cutbacks to its matching or other employer contributions for 2009. The average company contribution for the drilling industry was 6.65%. The average for offshore drillers was higher at 7.00% than for onshore drillers at 5.89%.
Many 401(k) plans now include an automatic enrollment feature to encourage employees to save for retirement and to simplify the enrollment process. The drilling industry is lagging behind national averages, which are approaching 50%, in implementing automatic enrollment into 401(k) plans. This may be due to the unique payroll complexities inherent within the drilling industry. However, automatic enrollment is becoming more prevalent in the drilling industry, with 37% of survey participants reporting its use in 2009 compared with 27% in 2008.
The median values for monthly payroll
deductions for PPO medical plans.
OPPORTUNITIES FOR IMPROVEMENT
There are many areas where drilling contractors can reduce benefit plan costs while maintaining their commitment to provide comprehensive benefit plans. A few areas to discuss with your benefit manager include:
- Reduce the amount of claims that are incurred outside the managed care network. Conduct an evaluation of your managed care network to ensure that the company is contracting with the vendor that provides the widest access and the most favorable network discounts in geographic regions where employees live and work.
- Evaluate the competitiveness of your pharmacy contract. Approximately 15%-20% of every healthcare dollar is spent on pharmacy. EBS routinely observes contracts with outdated pricing terms in effect. An updated pharmacy contract can reduce pharmacy costs by 7%-15% without changing copayments.
- Consider adding a fourth copayment tier applicable to “specialty medications.” The US Food & Drug Administration (FDA) is approving new specialty medications each day for consumers to purchase. The cost of specialty medications can be 15%-25% higher than brand-name drugs. A fourth-tier copay should share the additional cost burden with employees who use these therapies.
- Clean up your internal records by conducting an audit of dependents who participate in the medical plan. Often, employer records are outdated and still extend coverage to dependents who are no longer eligible for plan coverage.
Automatic features for drilling contractors’ 401(k) plans.
- Aggressively market your insurance policies in order to lower premiums on plans like life, accident and disability. The insurance marketplace is very soft and open to aggressive reductions in premiums while guaranteeing premiums for multiple years.
Retirement plans that are participant-directed require plan fiduciaries to manage them so that they benefit all participants. There are some regular tasks that need to be performed and the process documented to reduce the fiduciaries’ exposure to risk. Conducting these tasks should not only reduce exposure but also increase the value of the plan for participants.
- Establish an investment review committee to monitor the performance of the plan. The committee should meet quarterly. Minutes should be documented and retained.
- Hire an independent adviser to assess the performance of retirement assets, unrelated to any assessment of the fund manager or record keeper. In this review, identify performance of asset returns and the reasonableness of investment management fees that impact participants’ returns.
- Conduct a market review and competitive assessment of the record keeper to ensure it is competitive in cost and services. Document this process.
- Ensure that participants have the appropriate means to diversify assets.
Benchmarking through the use of survey data is a critical step to strategically ensuring that a company’s benefit plan is performing effectively and that it remains competitive. Knowing where your plans are relative to others is the first step in establishing a business case for change.
More about the annual Drilling Industry Benefit Plan Survey is available at www.ebenefitsolutions.com. Brett Haugh is principal of Employee Benefit Solutions.