The Functional Approach In Concept | Employee Benefits

As indicated above, the functional approach essentially is the application of a systematic method of analysis to an employer's total employee benefits program. It analyzes the employer's program as a coordinated whole in terms of its ability to meet employees' (and others') needs and to manage loss exposures within the employer's overall compensation goals and cost parameters. This approach can be useful in overall employee benefit plan design, in evaluating proposals for new or revised benefits, for evaluation of cost-saving proposals, and in effective communication of an employer's total benefits program to its employees. It can be seen that the functional approach, which is essentially a planning approach, fits logically with the total compensation philosophy.

The "package" or total approach to employee benefits is simply the purposeful management of an integrated program. Rather than continually reacting to current fads, outside pressures, and salesmen's pitches, the contemporary businessman relies on fundamental principles of management in developing, organizing, directing, and evaluating systems of employee benefits for his organization.

The functional approach represents such systematic management of the employee benefits function.

 

Need For The Functional Approach

The functional approach is needed in planning, designing, and administering employee benefits for several reasons.

First, in most instances, employee benefits are a very significant element of the total compensation of employees. Benefits have become an important part of the work rewards provided by employers to their employees. Therefore, it is important to employees, and hence to their employers, that this increasingly important element of compensation be planned and organized to be as effective as possible in meeting employee needs.

Second, employee benefits currently represent a large item of labor cost for employers. Depending on the industry, the particular employer, and how employee benefits are defined, benefits may range from less than 21 percent to more than 49 percent of an employer's payroll. Therefore, effective planning and hence avoidance of waste in providing benefits can be an important cost-control measure for employers.

Third, in the past, employee benefits may have been adopted by employers on a piecemeal basis without being coordinated with existing benefit programs, as suggested by the McCaffery quote previously. Thus, some benefit plans just sprouted in every direction. For this reason, it usually is fruitful to apply the functional approach in reviewing existing employee benefit plans to determine where overlapping benefits may exist and costs may be saved, and where gaps in benefits may exist and new benefits or revised benefits may be in order.

Fourth, because of new benefits and coverages, changes in the tax laws, changes in the regulatory environment, and other developments in employee benefit planning have come about so rapidly in recent years, it is important to have a systematic approach to planning benefits to keep them current, competitive, and in compliance with regulatory requirements.

Finally, a given employee benefit or program, such as a pension plan, often provides benefits relating to several separate employee needs or loss exposures. Therefore, an employer's benefit plan needs to be analyzed according to the functional approach so its various benefit programs can be integrated properly with each other.

Overall Employee Benefit Plans Concerns

Because employee benefits, as noted previously, provide such an important dimension of financial security in our society, some overall questions need to be asked to evaluate any existing or newly created employee benefit plan.

Employer and Employee Objectives

The design of any employee benefit plan must start with the objectives of the benefit plan from the standpoint of both employer and employee.

What Benefits Should Be Provided?

There should be clearly stated reasons or objectives for the type of benefits to be provided. Benefits provided both under governmental programs and by the individual employees also should be considered.

Who Should Be Covered Under the Benefit Plan?

Should only full-time employees be covered? What about retirees or dependents? What about survivors of deceased employees? These and a host of similar questions must be carefully evaluated. Of course, some of these issues depend on regulatory and legislative rules and regulations.

Should Employees Have Benefit Options?

This is becoming more and more of a crucial question under employee benefit plans because of the changing workforce. With the growth of flexible benefits or cafeteria plans, employee choice is on the increase. Even in nonflexible benefit plan situations, should some choices be given?

How Should Benefit Plans Be Financed?

Several important questions need to be answered in determining the approach to funding employer benefit plans. Should financing be entirely provided by the employer (a noncontributory approach) or on some shared basis by the employer and employee (a contributory approach)? If on a contributory basis, what percentage should each bear?

What funding method should be used? A wide range of possibilities exists, from a total insurance program to total self-funding with many options in between. Even when one of these options is selected, further questions still remain concerning the specific funding instrument to be used.

How Should the Benefit Plan Be Administered?

Should the firm itself administer the plan? Should an insurance carrier or other benefit plan provider do the administration? Should some outside organization such as a third-party administrator (TPA) do this work? Once the decision is made, the specific entity must be selected.

How Should the Benefit Plan Be Communicated?

The best employee benefit plan in existence may not achieve any of its desired objectives if it is improperly communicated to all affected parties. The communication of employee benefit plans has become increasingly important in recent years with the increased employee choice in several benefit areas and increased reporting and disclosure requirements. Effective communication and education of what benefit plans will and will not do is essential if employees are to rely on such plans to provide part of their financial security at all stages of their lives. Technology has provided many new options in this area.

Future of Employee Benefits

With the spate of legislation affecting certain aspects of employee benefit plans, the varying needs of today's changing workforce and the outsourcing of many benefit functions, some benefit experts believe there may be more changes than ever before. While certain new approaches and techniques may be utilized, employee benefit plans are woven into the fabric of our society in such a way that the basic character or importance of such plans will not be changed. With pressures to contain healthcare and retirement costs ever increasing, greater efficiencies in the benefits approach, more tailoring to individual needs in the growth of flexible benefits or cafeteria compensation plans, and other refinements will drive the employee benefits mechanism. While it seems certain that employee benefits will not grow as rapidly as they have in the past, their place is secure and there will continue to be a demand for people who are knowledgeable about all aspects of the design, funding, administration, and communication of employee benefits in order to make such plans more effective while helping to provide for the economic security of society at large.