Welcome toFIN/LIR 434: Employee

BenefitsProf. David Sinow

Tu/Th 11:30AM-12:50PMor

Tu/Th 1:00PM-2:20PM

Examples of Employee Benefits?

5 Traditional Categories1. Legally required social insurance2. Payments for private insurance

and retirement plans3. Payments for time not worked4. Extra cash payments to

employees5. Cost of services to employees

A Sampling of Course Topics

Retirement IncomePension plans – DB and DCSocial Security

Health InsuranceMedicareEmployer Provided Health Care

Incentive Based CompensationStock Options

Three Perspectives of the Course

1. As an employee, how can you best utilize the benefits that you are offered?

2. As an employer, how do you make effective use of employee benefits to maximize the value of your firm?

3. As a concerned citizen or policy-maker, what is the appropriate role for the government in regulating / providing benefits?

Is this Course Relevant?In 2004, for every dollar paid in wages, employers spent another 40 cents on benefitsEmployee benefits are a major force in determining employee retention / happinessGovernment provided benefits (e.g., Social Security and Medicare) are by far the largest expenditure of the federal budgetGovernment tax subsidies for privately provided benefits amount to hundreds of billions of dollarsIt is in the news nearly every day

The SyllabusIt is a “contract” – read it carefully!At some point in this course, I may ask a question on an in-class exercise or exam about the syllabus – so read it!

www.business.uiuc.edu/d-sinowCheck it out early and often, as it will contain:

Class announcementsLecture notes in Power PointProblem setsSolutionsGroup projectsHandouts

Because of this web site, this largely will be a “paper-less” classroom (I hope!!!!)

Getting to Know YouPlease Tell us the Following Information:

Your nameYour year and majorWhat you want out of this classSomething interesting about yourself that will help us remember you

Is this guy qualified to teach me?Education

B.A., University of IllinoisM.A., University of IllinoisJ.D., University of IllinoisPHD., University of Illinois

Academic ExperienceAt UIUC since Fall, 1990 (adjunct/ full-time since 2001)Research is focused on pensions, annuities, life insurance and advanced wealth management techniques

“Real World” Work ExperienceCEO Emeritus of Strategic Capital Bancorp, Inc.CEO Emeritus of Strategic Capital Bank/Trust CompanyConsultant to numerous banks, money management firms, and private clientsLicensed attorney, real estate broker, etc.

Introduction to Employee Benefits

By the end of this (brief) lecture, you should be able to:

Give a very brief and incomplete history of how employee benefits have developed in USName the three most important factors influencing employee benefits Explain the significance of employee benefits to companies, individuals and the economy

U.S. Benefits “History”1636: Plymouth settlers’ military pension1797: Gallatin Glasswork’s profit sharing plan1875: American Express – first US private employer pension1902: First workers’ comp law1911: First group life plan1935: Social Security Act1966: Medicare & Medicaid1974: ERISA2003: Rx Drugs Added to Medicare Program2006: Pension Protection Act

What are Employee Benefits?

The Broad View“All benefits and services, other than direct wages, provided to employees”

Insurance against accident, illness, disability, unemployment, deathRetirement savings and incomeVacations and holidaysTuition assistance, fitness centers, even massages!

Three Most Important Factors Influencing Employee Benefits

1. Self-Interest of Decision Makers

2. Taxation

3. Demographics

Self-Interest of Decision Makers

What are each of these groups after?ShareholdersCompany ExecutivesEmployees UnionsCongress and other Policy Makers

TaxationTax laws determine which benefits receive favorable tax treatment, and which do not.Congress has decided to provide favorable tax treatment to:

Pensions, health insurance, dental work, & moreTaxes can influence:

Whether to offer a particular benefitThe form that benefit will take

Changing DemographicsGender and the workplaceLongevityAge DistributionParenting RolesHousehold Composition

How Costly Are Benefits?In 2004, for every dollar paid in wages and salaries to civilian workers in the U.S., employers spent another 40 cents on benefits

Source: EBRI databook on Employee Benefits Chapter 3

Ballpark – the U.S. spends $1.5-$2 trillion dollars per year on benefits (roughly equal to GDP of U.K. or Germany)

Total Compensation Costs(Civilian Workers 2004)

Component Cost per Hour worked

Percent of Total

% Increase since 1995

Total $24.95 100% +36%Wages / Salaries $17.71 71% +35%Paid leave (vacations, sick)

$1.66 7% +36%

Suppl. Pay (shift pay, bonuses)

$0.60 2% +70%

Insurance (life, health, disability)

$1.93 8% +67%

Pensions $0.99 4% +39%Legally required (SS, Medicare, Unempl., WC)

$2.01 8% +26%

A Sampling of Current Issues

Reform of the PBGC“Automatic enrollment” in 401(k) plansSocial Security reformCompany stock in 401(k) plansMismanagement of 401(k) plan assetsAccounting treatment for stock optionsAge discrimination in conversion to cash balance plansTax reform commission – treatment of fringe benefits

Current Issues, continuedRising health care costsThe uninsuredSame sex domestic partner benefitsMedicare Rx drug coverageImporting Rx drugs from CanadaMental health parityRx coverage of birth control devicesLong-Term Care Insurance

Ways Employers Benefit from Benefits Plans (WSJ)

1. Pension Piggy Banks2. Inducements for Downsizing3. Low-Cost Retiree Health Coverage4. Savings from Medicare5. Cheaper than salaries6. Benefit Plans As Profit Centers7. Payroll Savings from Pre-tax Plans8. Low cost loans9. Joys of 401(k)s for employers10. Deducting Dividends (KSOPs)