Economics of Employee Benefits:
Econ/Fin 439/539 Fall 2005
Version 8
Last modified: August 2005
Instructor: Richard Hannah
Resume
Note: If you have a disability that may require accommodation with respect
to completing the requirements of this course under the provisions of the
Americans with Disabilities Act, contact the instructor immediately. With
respect to this or other matters I can be reached at:
E-mail: rlhannah@mtsu.edu
Phone: 615-898-2228 (office)
Office: Room 230 Honors Building
Consultations by appointment; easily accessed by phone message or email.
Jump to Syllabus
Course Objectives
Grading Criteria
Required Resources
The Daily Problem
Notes on Economic Theory & Employee Benefits
BLS On-Line Benefits Data Inquiries
Paper Topics and Special Readings
Paper Guidelines
MTSU Library Journals
Exam Examples
This is a survey course, meaning we will cover a broad spectrum
of employee benefits topics. The objectives include being well versed in
terminology, conceptual mechanics, and the practical context of benefits.
This is not a highly quantitative course, but ability to compute simple
time value solutions and to interpret statistics is required. I expect
students to understand some of the cutting edge issues and demonstrate
capability of investigating those issues via the Internet and other
sources. Such issues may be societal or employment related, but will also
be examined within the context of common sense economic principles. Cases
will be used as a learning aid.
Exams, papers, presentations, etc., are always graded on a 0-100
point basis. An A is 92-100 points, and A- from 90-92, and remaining letter
grades are in successively lower 10 point increments. However, I also reserve
discretion on this to include the quality of your participation in class
in movements in the + and - categories.
The components of the course grade are weighted as follows:
undergrads grads
Exam 1 20% 20%
Exam 2 20 20
Exam 3 20 20
Final 20 20
Paper & 20 (1 paper) 20 (10 for each of 2)
presentation (required depending on class size)
The paper/presentation requirement for grad students is two,
7-10 pages each. Undergrads are required to produce only one
paper of 5 pages.
Unless otherwise approved by me the undergraduate paper and first
graduate paper must be on a practical topic. The second graduate paper
must be on a major benefits issue, meaning of national scope. I am open to
alternatives to the paper categories, e.g., something more directly related to
your career plans, but you should work this out with me within the first two
weeks of class.
My exams tend to be open-book, open-note and comprehensive in the
sense that understanding the interrelationship of past and current
material is often emphasized. I don't give make-up or early exams
during the semester. Any excused exams are given at the end of the
semester.
I never give any form of "extra credit." But sometimes I do give bonus
points. These are points added to the student's final grade average. The
conditions, timing, and decision to award these points are at my discretion.
However, I usually do this through either in-class exercises or e-mail messages
to the class.
(1) Text: Employee Benefits: A Primer for HR Professionals, by Joseph
Martocchio.
(2) An Internet account. If you already have a permanent account, please
make sure I have your address. (3) Calculator capable of NPV, IRR, uneven cash
flow analysis. I only teach to a TI BAII-Plus, but you can use any calculator
with which you are proficient. Alternatively, you may use a laptop with
financial computation software. (4) Spreadsheet applications: lab,
work, or home--use will depend on number of students taking this course.
Note on Lectures
Graphical and computational mechanics related to theory are
covered in class. These lectures are text based explanations of
conceptual frameworks. Reading and (re-reading) this material is
imperative to formulating your questions for class discussion and
developing a well integrated framework in which to consider employee
benefits. I will likey assign some of these to idividual students
for short presenations in class. The focus should be on helping
other students visualize the conceptual content.
Note on "The Daily Problem"
At some point during (most) classes, preferably at the
beginning, I will provide a scenario based on a real situation.
The class will then break up in teams for about 10 minutes to consider
possible solutions. We will reconvene and each team's spokesperson (to
rotate) will be given about two minutes to relay their team's
recommendation, after which I will tell you the real outcome. I may modify
the composition and dynamics of the team configuration as the semester proceeds.
Guest Speakers
May occur on an ad hoc basis, depending on availability and
scheduling.
Sequence of Material Covered
I tend to construct the syllabus in close sequence with the text
chapters and stick to this progression. However, I find some flexibility
is crucial to accommodate class composition and chemistry, and schedule
conflicts that may arise. I will indicate in class any text material for
which you will not be tested.
Web Resources
Social Security Administration
Centers for Medicare and Medicaid Services
National UI Information Technical Support
U.S. Workers Compensation Law
Summary of Clinton Health Reform Proposal
National Committee for Quality Assurance
Employee Benefits Security Administration
National Center for Employee Ownership
Syllabus may be modified as needed, depending on class size, planned
activities and dates I may have to be out of town.
08/30____________________________________________________________
Ch. 1: Introduction to Employee Benefits
Review of time values and calculator use.
09/01____________________________________________________________
Ch. 1 continued
Your benefits plans.
Your parents' or spouse's benefits plans.
Written assignment due. 1-2 pages. Interview your grandparents, parents,
or other elderly person(s) who are receiving social security and medicare
benefits. Your paper should be a summary of their views of these systems,
how they are doing economically, and their major concerns for the
future. The papers will be graded as follows. Either two points will be
added to your final grade average because quality suffices; no points
awarded because of insufficient quality, or two points subtracted because you
didn't turn in the assignment on time. On time means at the beginning of this
class. Besides content, I am a stickler for good editing, grammar, and
written presentation that is formatted for easy reading.
09/06____________________________________________________________
Ch. 2: Economics of Employee Benefits
09/08____________________________________________________________
Ch. 2 continued
Time value exercises.
09/13___________________________________________________________
Exam #1
09/15___________________________________________________________
Ch. 3: Regulation of Employee Benefits
09/20___________________________________________________________
Ch. 3 continued.
09/22___________________________________________________________
Ch. 4: Employer Sponsored Retirement Plans
09/27____________________________________________________________
Ch. 4 continued
09/29____________________________________________________________
Ch. 4 continued
10/04____________________________________________________________
Ch. 5: Health Insurance Programs
10/06____________________________________________________________
Ch. 5 continued
10/11____________________________________________________________
Ch. 5 continued
First graduate paper due.
10/13____________________________________________________________
Exam
10/18____________________________________________________________
Fall Break
10/20____________________________________________________________
Ch. 6 Employer-Sponsored Disability Insurance and Life Insurance
10/25____________________________________________________________
Ch. 6 continued
10/27____________________________________________________________
Ch. 7: Social Security and Workers' Compensation Programs
11/01____________________________________________________________
Exam
11/03____________________________________________________________
Ch. 7 continued
11/08____________________________________________________________
Ch. 7 continued
11/10____________________________________________________________
Ch. 8: Paid Time-Off from Work
11/15____________________________________________________________
Ch. 9: Accommodation and Enhancement Benefits
11/17____________________________________________________________
Ch. 9 continued
11/22____________________________________________________________
Undergraduate papers due.
Second graduate paper due.
11/24____________________________________________________________
Thanksgiving
11/29____________________________________________________________
Ch. 10 Managing the Employee Benefits System
12/01____________________________________________________________
Ch. 10 continued
12/06____________________________________________________________
12/13____________________________________________________________
Final: 3:30-5:30
Corporate liabilities for retiree medical benefits
Corporate liabilities for other than pension benefits
(OPB's)--non-medical
Pension plan governance--public sector
Pension plan governance--private sector
International benefits comparisons--soc. sec. systems
International benefits comparisons--health care
International benefits comparisons--pension systems
International management of benefits plans--the multinational corporation
Real-time, on-line benefits information (Internet & Intranets)
Domestic partner benefits issues
Contingent worker issues
Economic theory and benefits value
National health care--complications with other insurance plans
Economic theory and actuarial science
Economic theory and benefits tax policy
Paternalism vs. choice in retirement options
Equity considerations in design of retirement systems
Exclusions from mandated coverages for small employers
Equity considerations and benefits design for active employees
Sick leave issues
Employee Training: Benefit or Investment?
Privacy: Medical and other records
Biology, psychology, and benefits
Labor force mobility and benefits
Phased, gradual, or trial retirement plans
Double dipping
Fraud in benefits
Economic viability of the Social Security system: options & current status
Exercising stock voting rights by pens. plan custodians
Economic power of pension funds
Interactions of labor market demographics and benefits eligibility/coverage
Executive benefits
Implications for cashouts
Equity (fairness) issues: intergenerational
Equity (fairness) issues: gender & gender preference
Equity (fairness) issues: single vs. family
Organizational culture and benefits
Benefits component of HRIS
Forensics anlaysis of benefits
Comparative analyses of life expectancies: history and trends
Benefits courses and instruction in higher education
Domestic partner benefits issues
Contingent worker issues
Economic Theory of Choice and Employee Benefits
Economic Theory of Trade-offs and Employee Benefits
Economic Theory and the Valuation of Benefits
Economic Theory of Labor Markets and Employee Benefits
Economic Theory and the Work-Leisure Model
Economic Theory and Rate Making in the Insurance Industry
Economic Theory and Risk
Economic Theory and Equity Issues in Employee Benefits
Economic Theory and Health Care
Benefits and Behavioral Influences
Governance of Employee Benefit Plans
Information as an Employee Benefit
HR, Benefits, and Personal Information
International Dimensions
Economic Theory of Choice and Employee Benefits
One branch of economic theory (neoclassical) puts forth the view
that individuals are better off if they can make their own choices among
alternatives. This proposition is extended to imply that if individuals
are better off, then the economic welfare of society as a whole is
increased. The underlying premise for this reasoning is, who is
better able to decide what is best for them than the individuals
themselves? There are of course certain ground rules (e.g., laws, social
norms, and exceptions) which even this theory accepts as the boundary
defining the range of choices.
How does this relate to employee benefits? In general, employees
are not given free choice among benefits. Why? Theoretically, rational
choice (making decisions which maximize individual welfare) implies
perfect knowledge and foresight. Thus, there is a direct clash between
theory and the real world. Employees obviously have imperfect
information and might make "bad" decisions vis `a vis employers who often
are argued to have relatively better information and therefore, can make
"better" decisions for employees.
As an example, consider retirement benefits, which on an actuarial
equivalent basis are equal if taken as a cash lump sum payment at
termination vs. a required annuitization for a monthly allowance. The
former view gives complete discretionary choice to the retiree. In the
latter view choice is restricted by the employer in the plan design.
This is a paternalistic philosophy which simply takes the position that
the retiree might wastefully spend the windfall and then be destitute for
the remainder of his or her life. (Paternalism is used herein only as a
philosophically descriptive perspective, not in a pejorative sense.)
Also note that there could be significant legal exposure to assets which
are cashed out vs. retained in an "unreachable" retirement fund.
There are good arguments from both perspectives. In reality
there are often many intermediate discrete choices, such as optional
payouts and survivor benefits, or in the case of non-retirement benefits,
flex plans. The intent of this lecture is to drive home the point that
choice is one of the conceptual issues that perennially lies at the
heart of benefit plans.
Economic Theory of Trade-offs and Employee Benefits
In the most simplistic terms economic theory illustrates
underlying principles involved in trade-offs by considering only two
choices. These choices can be expressed from either the employer's or
employee's view. Typically, from the employer's perspective the
trade-off might be different mixes of direct compensation and benefit
levels while maintaining the same profit level. But the perspective
with which most of us can identify is the employee's view.
Assuming the employee has the choice (refer to the lecture on
this topic), lets consider the trade-off between direct compensation and
benefits levels. Economists express this concept in terms of budget-line
/indifference curve analysis, with the former expressing the financial
constraint and the latter expressing the level of satisfaction.
Theoretical indifference curves are continuous, perfectly divisible,
convex, nonintersecting functions, which show that, for example, to get
more benefits you have to give up more and more direct pay (and vice versa).
This illustrates the law of diminishing marginal returns. [The graphics of
these analytics will be covered in class.]
Another form of trade-off might be present vs future income
(retirement benefit). Application of time value analysis [also covered in
detail in class] is crucial to understanding the psychology and
mathematics of these trade-offs. Essentially, we introduce discount
rates and the preference for current vs. future consumption in this context.
As an example of how powerful and important the clarity of
thinking is in such matters, consider why people generally prefer
consuming today vs. consuming tomorrow. Economic theory answers this
question by pointing out that we may not live until tomorrow and hence
prefer the certain satisfaction (utility) of consuming today vs. the risk of
never enjoying the consumption. Such is part of the underlying theory of
saving--e.g., the postponement of consumption.
Economic Theory and the Valuation of Employee Benefits
One of the most difficult dimensions of benefits is the
determination of value. Consider for instance, value to whom? The employer?
The employee? Perhaps even the dependents or survivors of the employee
or the successor to the firm? Does the cost to the employer equal the
value to the employee? What if the employee had to purchase the same
benefit in the market (replacement value)? What if the employer wants to
compare the cost of the benefits package of its employees to another employer,
or an industry norm? How does the value of benefits compute into total
compensation? How do you answer these questions?
None of these kinds of questions are easily answered even within
the context of theoretical abstraction. They are every bit as complicated in
practice.
Economic Theory of Labor Markets and Employee Benefits
The core of theoretical economics as taught in labor courses
relies on the assumption of homogeneous labor. This assumption suffices
when explaining labor market mechanics, but is weakened when we consider
the diverse individual characteristics of workers (heterogeneity).
Interestingly enough, one might go so far as to argue that we could
assume workers are the same in productive traits but could be different
in other traits. It is perhaps these "other traits"--family status, age,
health, risk attitudes, etc.--where benefits are more intensely focused.
Generally, the traditional HR defined objectives of attracting,
retaining, developing, and compensating employees include the benefits
component within the total compensation framework. Thinking of this from
a labor market perspective, this essentially is the total wage concept
captured in the demand-supply framework.
Thus, the configuration of benefits can be such to target labor
market segments--e.g., child care, generous retirement plans, medical
coverage, etc.... There are numerous "side effects" of benefit plans in
labor markets, especially with respect to labor market mobility. For
example, a large portion of workers are "bound" to employers through
retirement plans which reward longevity or medical plans which can not be
duplicated elsewhere, usually because of pre-existing condition
restrictions that may inhibit changing employers.
In this context the labor market policies of government are a
critical factor. Pension vesting, portability, roll-overs, and the
evolution to a national health care plan are crucial to individual
decisions about employment choices. Finally, in theory labor market
mobility is considered essential for an efficient economy. Hence,
benefits figure prominently in our understanding of and policy making for
labor market activity.
Economic Theory and the Work-Leisure Model
The graphical mechanics will be demonstrated in class. There are two
important points to glean from this model. One is the impact of
subsidies on labor market behavior. From the benefits perspective, the best
example of these subsidies are perhaps retirement and disability income
subsidies.
The second benefits lesson from these models is the suboptimal
solutions generated by trying to design a "one size fits all" benefits
system. If the employer objective is to accommodate the diversity (or
heterogeneity) of employees through the provision of choices, then we
must also recognize that choices imply administrative complexity, a much
more sophisticated benefits communication and education program, and
consequent higher cost. The question for the employer is whether the
added employee satisfaction and perhaps productivity justifies the expense.
Economic Theory and Rate Making in the Insurance Industry
This lecture focuses only on one simple idea--price
discrimination. Essentially, rate making is the development of a "price"
that is applied to a rate class (group). The idea of price
discrimination is similar, but it can occur in degrees and essentially
arises because the demand for a product exhibits less than perfect
elasticity. Price discrimination is generally characterized in three
degrees: 1) block pricing--often referred to as discounts for additional
purchases, 2) charging different prices for the same product in
different markets, and 3) pure price discrimination, selling each unit of
the product separately and charging the highest price the customer is
willing to pay for the separate units. This is a cursory treatment of
the basic theory, which is dependent on specific assumptions--obtainable
from a basic economics text.
With this conceptual framework in mind, clearly the regulatory
requirements for rate development and equity considerations temper the
pricing structure of insurance products. Economic theory guides us in
that we can pose such questions as, what would the rate structure look
like in the absence, or reduction of regulatory oversight, a very crucial
social as well as economic question. For example, assume this class is a
group of employees. If medical insurance could legally be priced in any
manner, and if you had appropriate demographic information, what do you
think the pricing structure would look like?
Economic Theory and Risk
You may recall from your statistics classes the "law of large
numbers," or the central tendency theorem. Statistical predictability
follows from this concept (or variations). Insurance companies are
partial to business from large groups for this reason. This is also one
of the underlying fundamentals for large firms to self-insure. The basic
idea is if you can predict with precision, then you can manage risk.
The flip side of this is of course small groups. The problem is
the risk (or probability) of a large claim in a small group of insured or
covered employees can be financially devastating to a firm. Some of this
risk can be managed by the development of rate classes (grouping small
groups into large groups) by insurance companies. Therefore, an
insurance company might be better able to manage risk (because of the
law of large numbers) than a single firm.
We can look at risk another way from the perspective of economic
theory, the psychological influence of the potential loss. For example,
assuming a 50/50 probability of heads/tails, you might be willing to flip
a coin with me all day for a penny win/loss per flip. But what if I
raise the payoff/loss to $1, or $5, or $100, or $1000 per toss? Nothing
has changed about the probability. What has changed? If you are like
most people, this is why you will buy, or want your employer to provide
as a benefit, insurance.
Economic Theory and Equity in Employment Benefits
This is a vast and controversial topic, and only the broadest
conceptual framework is possible herein. First, economic theory is not
monolithic. There are competing, and, as often as not, conflicting
theoretical explanations and predictions for the same events. For
example, one branch of economic theory, neoclassical economics, basically
assumes that competitive markets provide the best solutions to economic
problems. Other branches of economic theory (e.g., institutionalism,
game theory, or Marxism) argue that either many markets are not competitive,
and hence the neoclassical position is not always defensible, that there are
externalities which prohibit market solutions, or that the market system
itself is flawed with "inhumane" outcomes.
Within this context what we deem from individual or societal
perspectives to be fair or equitable, may have no relationship to market
outcomes. For example, we may not think it fair that we pay a high FICA
tax on our earnings, assuming that we could probably earn more via
privately investing these funds. But is it not equitable that we
contribute to the economic security of the generation that raised us?
Similar controversies abound.
More directly with respect to benefits, the idea of equity builds
on the previous lectures on price discrimination, risk, and regulation.
To reduce risks we cooperate via insurance, or similar, arrangements. To
ensure fair rules of pricing we devise methods of government intervention. To
form our own judgements of what is fair with respect to benefits, as employees
and employers we inevitably make comparisons. (As an aside, the quality of
comparison depends on the quality of information, and information in economic
theory, and benefits, is an equally crucial but different topic extending
beyond this discourse.)
So, as a practical matter we must consider the motivation, design,
and administration of benefits to develop some frames of reference for equity
considerations. In a nutshell, economic theory holds two concepts that
are widely accepted, vertical and horizontal equity (sometimes referred
to as between-group vs. within-group equity). Essentially, the premise
is that treating different groups differently (unequally) is acceptable, but
individuals within the same group should be treated equally. Hence, we
arrive at how groups are defined, and this has been the thrust of much of
our study of benefits, especially as related to HR policies and
administration. Examples include union vs. nonunion employees, exempt
vs. nonexempt employees, key vs. other employees, and executive benefits vs.
all other employees.
Discrimination testing and compliance with regulations is one
method of ensuring equity within qualified benefit plans. The joint
administration of trusts under Taft-Hartley provisions is another
method. But if we want to approach the frontier of equity in benefits
plans, I think we must take a broader look at governance.
Economic Theory and the Health Care Industry
While the issue of a comprehensive national health care system
dates as far back as the Truman Administration, the economic imperative
seems to be stronger in recent initiatives. Several competing proposals
were debated in Congress early in the Clinton Administration. The intent here
is not to delve into the politics of competing plans, and their
subsequent defeats, but to add a bit more insight into the complexity of the
issue. For that purpose only one plan is summarized below, the Clinton
proposal. (Source: "Preliminary Draft of the President's Health Reform
Proposal, 9/7/93).
The core problems with the existing system as outlined in the
Clinton proposal were: 1) lack of security--e.g., lost coverage, no
coverage, inadequate coverage, 2) rising cost--up to 15% of GDP, 3)
overwhelming bureaucracy lending to confusion and higher cost, 4) uneven
quality--no clear standards, 5) inadequate long-term care coverage, 6)
geographic shortages--rural and intercity areas, and 7) fraud and abuse.
Furthermore, the Clinton proposal was premised on the following ethical
foundations: universal access, comprehensive benefits, choice, equality
of care, fair distribution of costs, personal responsibility,
inter-generational justice, and wise allocation of resources and many
other effectiveness and efficiency concepts. Obviously, this
proposal was aligned with the idea of full-blown change in the health care
industry, compared to the incremental approaches advocated in competing bills
proposed in Congress.
The Clinton proposal does contain nuts and bolts insights into
the complexity of reform. Essentially the existing government programs
of Medicare, military personnel coverages, Veteran benefits, and the
Indian Health Service would not be changed. The problems of
interdependent coverages through such systems as workers compensation,
automobile insurance, and various insurance riders were addressed.
Creative plans included bureaucratic streamlining of paperwork and
arbitration (or other third party intervention) of malpractice suits were an
explicit part of the proposal. However, in the end the failure of the
bill to pass was related to cost, and in particular the reluctance of
small employers to bear additional cost. A political science explanation
would also point out the obvious shifting of power among interest groups
as another reason for the bill's demise.
Interestingly enough, the creation of health alliances (also proposed
in the bill), particularly on the purchasing side of the market does seem
to have progressed even without the bill. Essentially, this is the
economic theory part of this lecture. The anomaly of health care has
been the traditional "disassociation" of the demand and supply side of
the market. At one extreme of economic theory the argument is that the
price system should be unfettered through cost sharing and shifting, and
other creative approaches to allowing employees more health care
choices. A competing theoretical perspective is that big players are
needed on the demand side of the market to countervail the power that
has been entrenched on the supply side of the market. In pure theory,
this is the old bilateral monopoly (monopsony-monopoly) argument. In
various manifestations, this indeed seems to be the current state of
market power realignments drawn from industry restructuring.
Benefits and Behavioral Influences
From the HR perspective a general conclusion about the value of
benefits to the employer would include the attractiveness to recruit,
retain, and retire workers. A more detailed penetration into benefits
design also requires comprehension of potential influences on work
performance or behaviors.
There are many practical examples including sick leave and
workers comp use/abuse. E.g., in my practical experience I have
encountered cases whereby employees near death with terminal illness remained
on the job because their death benefit accruing to the survivor was greater
than a disability benefit.
One of the more interesting aspects of worker behavior is the
decision to retire. For example, an organization contemplating
downsizing might design early retirement incentives to entice employees
to terminate voluntarily. The design of such a benefit is crucial in the
determination of who might elect retirement. Questions to be resolved
include: To whom will the incentive be extended? How many might make
this election? Will critical employees who were not anticipated to elect
the benefit be lost? These are obviously very important problems to be
worked out with the actuary. Actually, the retirement incentive might be
just as easily accomplished with a severance pay package under the right
circumstances. Either way, an interesting topic of research is the
behavior of retirees. Do they withdraw from the labor market
permanently, partially, or particularly in the case of younger retirees,
do they simply seek other employment?
Essentially, predicting the behavior is an attempt to tap into
the psychology of the worker. The economic concept of the indifference
curve might illustrate the conceptual point, but past experience is
probably the only objective guide. This experience might be modeled on
one employer's history or rely upon pooled data from a consultant.
Governance of Employee Benefits Plans
The fiduciary duties and responsibilities are adequately covered
in most standard texts, especially with respect to retirement systems.
The main focus is the duty to act solely in the interest of plan
participants and beneficiaries. However, governance has an entirely
different dimension which includes the power to make exceptions (e.g., to
correct administrative errors), to define the guiding principles of
equity relied upon in plan governance, and to consider and act upon the
responsibilities of providing information, communication, and education
to plan members, especially in an era of extending choices. A clear
understanding of the philosophical dimensions of choice as contrasted to
paternalism is therefore essential. Where there is discretion to be
exercised, consistent reasoning for decisions is crucial. In this
context, the history of the institution of governance is a vital guide.
The evolutionary character of such a history is not always easily
identified. For example, we might pose the (somewhat abstract) question of
whether the institution is the accumulation of governance under all past
boards of trustees or whether it is the current board.
The structure of boards of governance is important as well. Are
they appointed, elected, or moderated with outside directors? One would
think that with trillions of dollars in assets and millions of workers'
and beneficiaries' economic welfare in hand, we would know more, or be
more concerned about the nature of governance which does not fall under
the intense fiduciary scrutiny of regulators.
Information as an Employee Benefit
Perhaps we have entered an age in which information is the coin
not only of wealth, but also of economic welfare. With respect to
benefits, how much can we expect employers to provide, and how much can
we expect employees to understand? The electronic media are certainly
changing the possibilities for delivery, both in volume and frequency.
In addition the electronic processing of claims, and the monitoring and
changes of benefits status by employees are making strides.
One could even conceivably argue that electronic information
about the employer (e.g., economic health) should be a benefit
deliverable to employees through electronic media. These possibilities
will likely be more expensive as the market is tested by service providers
and progressive employers search for new ways to provide benefits for the
types of employees desired.
HR, Benefits, and Personal Information
In our modern, information driven socio-economic system the
relationship between the employer and employee has undergone dramatic,
though not always apparent, changes. Consider all the information an
employer may have about the personal lives of employees--e.g., medical
records about the employee (and family), financial transactions, work
related history, security clearances, drug test results (and in some cases
even DNA profiles), etc... So, while on one hand labor economists point
out that the employer-employee relationship has become more tenuous
economically, on the other we should recognize that the employer's ability
to look inside our personal lives has progressed in the opposite
direction.
However, while our personal lives have become more transparent to
the employer, a future issue may be how transparent the employer's
internal workings are made to employees. In the literature about
e-commerce, the keyword is trust. An interesting issue to contemplate is
whether the trust relationships that define social and economic
relationships in the work context may require expansion of corporate
transparency.
International Dimensions
Whatever conclusions we may reach about the complexity of
employee benefits in the U.S., multi-national corporations and
expatriates pose an entirely different challenge. Furthermore,
differences in industry regulation and structure (e.g., insurance) in
different countries provide sharp contrasts to the structure and
conduct of comparable markets in the U.S. Not the least is the national
tradition of social insurance in most other industrialized countries.
For example, the Social Security system in the U.S. negotiates
(totalization) agreements with other non-U.S. systems with respect to
participation of expatriates.
In a nutshell the economic wealth, tax policies, degree of
industrialization, demographic distribution, cultural influences, and
political systems form the broader context to gauge the evolution of
benefits on the international scope. A very good summary of this topic
is Mary E. Horn's _International Employee Benefits: An Overview_ (IFEBP:
1992).
Think of me (the instructor) as your CEO. Assume you are the HR or
Benefits person(s), or member of the committee or board responsible for
managing or making decisions for the problems given below. After your team
confers, (as appropriate for the problem) I want to know: a) what kinds of
additional information you need, b) what actions will you take, what you are
going to tell the employee involved, or what policy insight can you offer,
c) why do you think the benefits aspect of this situation arose and d) how
this might represent larger issues (as reflected in course subject matter
covered).
(1) A vendor approaches your firm with a proposal to oursource benefits
communication with employees. The core of the propsal is to give
employees access to their benefits information via the Internet. Since
your firm's employees are widely dispersed and many work from their homes
or on the road, this plan has considerable appeal. You are appointed to a
committee to assess the pros and cons of such a plan. Discuss and itemize
the major considerations, being specific as to the type of benefits and
potential issues related to them.
(2) Assume a plan is before Congress to partially privatize Social
Security retirement contributions--that is, allowing individuals some
discretionary control by setting up an individual account. Itemize the
pros and cons of this approach, reflecting an understanding of how such a
proposal would work.
(3) I recently received my Personal Earnings and Benefit Statement from
the Social Security Administration. The essential information contained
is: (1) At the end of 1999, when I was 46 years old, I had paid $42,871
into the OASDI Fund and $10,138 into the Medicare Fund. (2) If I
continued to work at my present rate of pay, my monthly benefits at
retirement would be: $1,060 at age 62, $1,480 at age 66, or $1,975 at age 70.
If I became disabled today, my benefit would be $1,325. If I died now, my
wife would be eligible to receive $1,360 per month at her full retirement
age. The one-time death benefit is $255. Make appropriate assumptions
and computations to illustrate the economic value of this "package" to me,
my relations, and society.
(4) A worker with over 20 years experience with your organization comes in
one day and says, "I'm planning to retire and would like to know what my
benefits will be." You pull the person's file and find a document she
signed 20 years ago stating she didn't want to participate in the retirement
plan. What do you do now?
(5) You are a member of a disability committee on a retirement system
board of directors. Only the most controversial cases come to this
committee--ones for which even the physicians can't reach a consensus.
Your committee and the full board approves a retirement disability and
subsequently finds out the person is still working full-time for your firm.
What actions should you take?
(6) The disability committee described above has a case before it in which
an employee has already been declared disabled by the Social Security
Administration. This employee has now applied for retirement disability on
the basis of health problems derived from obesity. The physician's
reports indicate the individual has been repeatedly informed that weight
loss is necessary for health improvement. What do you recommend and why?
(7) The disability committee described above has a case before it for
which the employer is seeking that an employee be declared
psychologically disabled. The medical reports support this position, but
you also have a letter from the employee involved that he is perfectly
fit and is currently on the job and wants to continue working. What do
you recommend and why?
(8) Create a list of as many reasonable definitions of total disability as
you can in the allocated time. For each definition, explain how you are
going to decide if a person meets the respective definitions. Do this
from the employer (or insurer) perspective.
(9) A large university has argued for years that employee absenteeism and
particularly sick leave abuse are costly in terms of lost productivity.
The employees counter this argument with the view that if sick leave were
so costly, the employer would devise a plan to give employees an
incentive not to use it. The employer then does implement a plan which
in effect pays the employees a bonus for unused sick leave at the end of
the year. The sick leave accrual is one day per month. Also, the
employer has an annual leave accrual varying between 1-2 days per month
depending on the length of service. Evaluate this proposal and plan, and
be prepared to comment on what you think the outcome was.
(10) A medium size public university is in the process of contracting out
its entire food service operation. While most employees in this operation
are part-time or temporary in employment status, there are several who
have been long-term, some over 15 years, in service. As part of the
conditions in negotiations the university insists that these long-term
employees be given the option to elect employment with the contract
vendor, and those employees who do not sign on with the new employer can
remain in the food service operation under the direct management of the
contractor, but essentially, the contractual arrangement will be that they
are still state employees and the contractor reimburses the state for their
compensation expenses. Analyze the potential issues related to this
arrangement from the benefits perspective.
(11) As HR director you get monthly reports on the cost per worker with
respect to unemployment experience rating. Most of the costs are
insignificant, but you question the eligibility of some terminated employees
to receive these benefits. What is your course of action? Explain your
rationale.
(12) As HR director, one Monday morning you get a call that a security
officer in your organization has been arrested for cocaine possession.
After a three day suspension with pay for an internal investigation, your
advice that the individual be terminated is followed. Next month you get
a report indicating that this individual has filed for unemployment
benefits. What is your course of action? Why?
(13) An employee (painter) suffers a job related neck injury and files for
workers compensation and subsequently begins receiving the benefit.
After a few months the individual is released for light duty work
by her physician, and she inquires of the personnel director about
returning to light duty work. The personnel director allegedly says,
"We don't have such work and we don't take back workers on a restricted
duty basis." Since the physician "released" the individual, the workers
comp insurance terminated the workers comp check, but medical coverage
continued. The check termination and other circumstances generated a law
suit by the employee against the workers comp insurer for lost pay. During
this period the employee suffers other problems (disc degeneration detected
and is diagnosed with lupus). The physician's report indicates 15 percent
partial permanent disability. The insurance company is offering a settlement
of $25,000 and three years medical expense coverage. The case is about to go
to trial. What is your assessment of what will happen in this case and why?
(14) You get into a discussion with your 55 year old landscape contractor
who relays that his wife will be well taken care of if he dies because of his
$300,000 death benefit he just bought for $30 a month through an optional
plan offered by his employer. What do you think has happened?
(15) I have a universal life insurance policy, an optional benefit from
the company, that has averaged a 15% annual return for the past five years. In
fact it has earned so well that my insurance company contacted me and said I
couldn't make any more premium payments for 5 years without increasing the
death benefit. The company representative has told me that I can raise
my death benefit from $50k to $100k and at age 66 (age 45 now) start
drawing $10k per year for the rest of my life, assuming a 12% annual
return. What should I consider doing?
(16) Your benefits manager has informed you (HR director) that a very
upset employee has demanded to see you because he's not satisfied with
her answers. The situation is that this 30 year old employee has AIDS,
and his physician has told him he has about a year to live. This
employee is adamant that he has disability insurance. You pull his file
and find a form used in the benefits orientation session for new
employees and that he checked that he did not wish to purchase disability
insurance. You ask if the signature is his and he confirms it, but says
he did not understand what he was signing and that a proper explanation
was never given to him. He next threatens to see an attorney. What is
your plan of action?
(17) An employee with a very lengthy and commendable work history has
contracted brain cancer. Her supervisor worked out an arrangement
whereby she could work part time (maintaining the minimum hours to keep
medical coverage). But as the treatments have been more draining on her
health, she has used all of her sick and annual leave. Her department
director is in a critical situation and must have someone do the work of
her position. She is a low paid employee; her husband is out of work,
and she has no disability insurance. As HR/Benefits director you've
been asked to make recommendations.
(18) As HR director at a university, late one Friday afternoon a
screaming, angry faculty member comes into your office yelling what a
bunch of incompetent staff you have. This person is obviously extremely
upset and she tells you her daughter is on the operating table in another
city in the state ready to go into emergency surgery, and she (the
mother) is told the daughter is not covered by the university's medical
insurance. The daughter is 24 years old and enrolled in a university.
What do you think has happened? What can be done?
(19) Your company is providing medical benefits through a PPO plan. Most
of your employees use a well respected regional medical complex which
provides comprehensive medical services. You have now been informed by
the insurance company that this hospital will be dropped from the PPO
plan, effective in two months. There are other local hospitals in the
plan, but none offer the range of services of the one being dropped.
What are the potential consequences to the employees and their
dependents? Be specific as to the kinds of problems this change will
generate from a Benefits/HR and broader administrative approach.
(20) I am running down the road daydreaming and take an awkward step,
consequently fracturing my foot. I call my wife who takes me to the
emergency room. After treatment, the attending physician recommends I see
a local orthopedic doctor. What questions do you have which will clarify
the coverages and benefits available to me.
(21) You are the benefits administrator and an employee comes to you with
a problem. Essentially, she experienced a hospital stay, and the
insurance paid the UCR. But the hospital is now billing her for the
difference between its fees and the UCR. What can you do to help this
employee?
(22) An employee participates in a medical plan with the following
provisions: $300 all-cause deductible during the calendar year, 10%
co-payment, annual out-of-pocket maximum of $5000. This individual
incurs a medical expense of $25,000 in December, but only $20,000 of
these expenses are covered. How much of the total medical expense should
the employee be prepared to pay?
(23) Construct a simplified mathematical formula incorporating
deductibles, co-insurance, and an out-of-pocket maximum for covered
expenses. Explain how this can be incorporated into a spreadsheet
computation and reporting format.
(24) Your very large government agency is considering implementing a
flexible benefits plan. As an employee representative you are on the
committee evaluating plan administration proposals from nationally
recognized benefits consulting firms. In a meeting one of the
consultants starts explaining the concept of burn-off, meaning
that essentially by offering a cafeteria plan, healthy employees will opt out
of expensive medical coverage options. With only expensive employees left in
this plan the premiums will go higher and higher for this group. What is your
reaction? What are the related issues? What, if any, options do you
propose?
(25) Why did some many children have braces on their teeth in the early
1980s?
(26) The School Board of the City of Murfreesboro is considering
withdrawing from the City's medical benefits plan and joining the State of
Tennessee plan. The School Board employees represent about 50% of the
total city employment. The reason withdrawal is being considered is that
premiums have dramatically risen for the city plan. One of the primary
reasons the premiums rose is that approximately a half million dollars of
medical expenses were incurred by a catastrophic illness within one
family. The plan is administered by the Murfreesboro City government.
You have been hired as a consultant to render advice on the wisdom of the
change. (i) List the kinds of questions you want to ask to clarify the
situation. (ii) List the potential problems areas you'd advise the School
Board to prepare for or to monitor should the switch be approved.
(27) I am refinancing my house. At closing I notice in the documents a
mortgage insurance cost of $13,000 to be spread over the 15 year
mortgage--i.e., it is rolled in as part of the $150,000 to be financed,
and paid in monthly installments. A few days before my retirement system,
which also markets term life insurance, sent me the following offer to
purchase term life (for non-smokers). Since I am several years older than
my wife, I have concern that she not be burdened with the mortgage should
I pre-decease her. Analyze the two options--accepting the $13,000
mortgage insurance financed by the bank, or purchasing the term life
policy. I am 46 years old. What should I conclude?
Quarterly Costs for different policy values
Age $100,000 $150,000 $250,000
18-32 $32.00 $46.50 $57.38
33 32.25 46.88 58.00
34 32.25 46.88 58.00
35 32.25 46.88 58.00
36 33.75 49.13 60.50
37 34.50 50.25 62.38
38 36.25 52.88 65.50
39 38.50 56.25 69.88
40 40.00 58.50 72.38
41 42.50 62.25 77.38
42 46.00 67.50 83.63
43 49.00 72.00 89.25
44 52.25 76.88 95.50
45 56.25 82.88 103.00
46 60.50 89.25 111.13
47 66.00 97.50 121.13
48 71.00 105.00 130.50
49 77.75 115.13 143.00
50 84.75 125.63 156.13
51 92.00 136.50 169.88
52 101.75 151.13 188.00
53 112.75 167.63 208.63
54 125.25 186.38 232.38
55 140.25 208.88 260.50
56 129.75 193.13 240.50
57 142.00 211.50 263.63
58 157.75 235.13 293.00
59 177.75 265.13 330.50
60 200.50 299.25 373.63
(28) You are a member of a retirement system board and are given a copy of
a letter at a meeting in which a widow is explaining that her husband
retired 3 months ago from your organization's defined benefit plan.
The present value of his retirement was about $500,000. He died last
month and she discovered he had chosen the maximum payout option with no
survivor benefits. Hence, according to retirement system rules she is
entitled to nothing. She demands the option be changed and says she has
retained an attorney to bring suit. What is your immediate conclusion?
What should be the course of investigation of this case?
(29) An employee who works for the state government is lamenting to you
that she has very little retirement benefit in the state's defined
benefit plan since she has worked at this particular department for only
a few years. In the conversation she relays that some years ago, before
she quit work to rear her children, she worked several years for various
other state departments. What action does this suggest on your part?
(30) A team is established to evaluate implementing a new retirement
plan. In working through the issues the team is now centered on the
concept of replacement ratios. Relying upon your estimate of the
demographic distribution of this class, instructor included, determine
what you consider an appropriate replacement ratio target. You may
consider either a defined benefit or defined contribution plan. What are
the equity issues? Plan design considerations? Regulatory issues?
(31) A defined benefit plan provides for an automatic joint and survivor
benefit of 50% for married employees. This means if the employee does not
elect another option and dies in service or retires, this "Option A" is put in
effect. The other options are:
Option B: Single life annuity, no survivor option.
Option C: Joint and Survivor, equal payout for retiree and spouse.
Option D: Joint and Survivor (A or C), but with a period certain payout.
What are some of the less obvious issues likely to be encountered in such
a plan with respect to the types of options available?
(32) The governing board of a defined benefit retirement plan is meeting
to discuss a number of plan changes. The motivations for these changes are
employee discontent, the desire to offer a competitive total compensation
package, and fairness issues brought up by different board members. The
proposed changes are:
a) Lower the plan participation age from age 20 to age 18.
b) Allow pro-rata retirement credit for part-time employment.
c) Credit full time service with the employer prior to plan adoption.
As a board member, what kinds of actuarial information would you
want to examine or request?
(33) An employer offers a choice to employees of whether to participate in
a defined benefit or defined contribution plan. The defined benefit plan
only allows a $5000 cash out maximum, while the defined contribution plan
can be cashed out in entirety (if vested) at termination. What kinds of
potential sex discrimination issues might be involved with these plans?
(34) A terminally ill employee comes to you and flatly says his only
concern is whether more money will accrue to his survivor if he dies
while he is still employed or takes disability now. What is the course
of your investigation?
(35) You are a board member of a retirement system trust and have been
given the committee assignment of outlining the considerations by the
full board with respect to portfolio restructuring. Summarize your plan
to accomplish this task, making sure you itemize the major considerations.
(36) In the process of completing an assignment from your professor you
are researching historical retirement system documents of a municipal
government. You notice that the investment committee recommended that
retirement funds be invested in a local real estate development. You
observe that two members of the pension board are involved in this real
estate firm as corporate officials. Your professor asks you to write a
page summarizing what you conclude from this observation.
(37) A retiree has a SMI plan with an out-of-pocket max of $5,000 for
major medical. He is in chemo therapy and gets a letter from his medical
provider that the SMI has stopped paying because the maximum has been
reached. You are responsible for this person's economic welfare--i.e.,
you have the power of attorney. What kinds of inquiries do you need to
make to assess the potential financial impacts of this development?
(38) You are getting divorced (amicably) and work out a financial
settlement with your soon-to-be ex-spouse in which you keep the house and
most of the furniture in exchange for $40,000 paid to the other
party. You don't have $40,000. Considering possible employee benefits
resources ONLY, what are the possibilities for coming up with the cash?
(39) Your employer announces that a new LTC plan will be offered to
employees. This is a voluntary benefit and the employee must pay the
premiums. Assume you are about 50 years old and have been involved with
your parents' health and financial situation enough that you have a good
grasp of issues related to such plans. Having gone through a benefits
course, your fellow employees look up to you as being knowledgeable in the
area and like you to develop a list of pros and cons for them to consider
in whether such a plan fits their needs.
Subject: Employee Benefits Exam #1 Spring 2000 (fwd)
Answer each of the following as thoroughly as you can given the two hour
time limit. I advise reading through the exam through first to decide how
you will allocate your time. For any computations, assume annual,
end-of-period compounding. Explain/show enough of your work for me to
duplicate your results.
1) I have a variable universal life insurance policy with a cash value of
$65,000 today and a $100,000 death benefit. I bought this plan 20 years
ago and it has on average earned a 10% rate of return annually. I'm
thinking about keeping the policy for another 10 years before converting
it to an annuity. Illustrating with computations, explain to me the
wisdom (or lack thereof) of thinking about this policy this way.
2) I have been diagnosed with a terminal illness with six months of life
expectancy. I have a $50,000 group term life insurance policy through my
employer. I am age 55 and will not vest in the retirement plan for 3 more
years and have virtually no savings and my spouse has never worked. I am
especially concerned about my spouse's economic well being and come to
you, the company's benefit director, with this situation and ask you to
lay out the options I might consider. Do so.
3) Given what we have studied so far, list the ages at which certain
benefits qualifications might occur (e.g., eligibility) and explain what
they are with one statement each.
4) Assuming the actuarial analysis of the financial dynamics of the Social
Security Retirement Fund is correct, explain the options for strengthening
the system financially.
5) Explain how cross-subsidization can work to the benefit of retirees in
a firm's medical insurance plan.
6) Explain the concept of adverse selection in the context of dental
plans.
7) Explain the concept of adverse selection in the context of continuation
of term life insurance upon employment termination.
8) Explain the concept of inelastic demand in the context of medical care.
9) Explain my statement in class that "we have national health care, but
we don't have a national health care plan."
10) If you are an employer and determine that your medical insurance plan
as structured is just too expensive, explain five options to change this
situation.
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Subject: Employee Benefits Exam #2 Spring 2000 (fwd)
Answer each of the following. Show enough of any computational work or
written assumptions for me to duplicate your answers.
1) A defined benefit plan's pension value is based on years of creditable
service, the highest average three years average salary, and a pension
factor of 2.0.
a) I am ready to retire today with 30 years creditable service and my
highest three year average salary is $50,000. What is my annual benefit?
b) Assuming a 7 percent interest rate, if instead of electing to
participate in the defined benefit plan when I was employed, I had
participated in a defined contribution plan, what would have been the
annual contribution required to equal my annual defined benefit in (a)?
2) A defined benefit plan states the plan document that the retirement
benefit is in part based on the highest single year earnings from the
employer.
a) Describe variations of interpretation of this language.
b) Describe how an individual might take advantage of such language.
c) What are the likely results of the way earnings are defined in this
computation vs. the more common alternatives?
3) From an international perspective, describe how other countries often
vary from the U.S. with respect to:
a) pension funding
b) governance
c) cash out vs. annuity
4) With respect to profit sharing plans, what are the two key points made
in class about the nature of contributions?
5) You are the benefits specialist for my employer. I am an employee who
is 55 years old. I am eligible to retire today after 30 years of service
in a defined benefit plan and receive an annual benefit of $30,000. I
have $50,000 total assets in the company's 401k plan. The company has no
medical insurance benefit for retirees. I say the reason I want to retire
now is I have a very serious heart condition and my doctor says the stress
of my job as an academic will likely kill me. Let's say I'm your best
friend and you want to give me the benefit of your expertise so I can make
the very best decision for myself. You are of course empowered to check
the status of all my benefits.
a) Itemize items you think might be important to consider that I have
not provided above, and state why you think they may be important.
b) Generally sketch out what you think I should consider as my two or
three best options to consider. You can make the necessary assumptions to
clarify your response, but tell me what they are.
6) Read the following abstracted language from The Tennessean and write a
brief analysis and conclusion based on what you've learned about pension
systems in this course. A flowchart may help.
"$6.5M Metro Pension Holding at Risk: Run by former execs at prison firm,"
The Tennessean, Feb. 27, 2000. vol. 96, No. 58, p. 1A and 6A. By Thomas
Goldsmith.
"More than $6.5 million of Metro employees' pension money is invested in a
poorly performing fund headed by two ousted executives of Prison Realty
Trust, the financially struggling Nashville-based owner of prisons. Last
week, principles of DC Investment Partners sent Metro a draft memo that
says they will 'terminate' the firm's Opportunity fund, days before the
Metro Employee Benefit Board was to decide whether to unload its
investment. An original $7.5 million stake in DC Investment Partners has
lost some $800,000--more than 10%--in less than two years of booming
financial markets.
(Begin 6A) Metro and DC Partners could not estimate the city's eventual
payout. But the details of the investment open a window on benefit board
practices as the agency undergoes the first audit in its 37 year history.
The pension fund's investment in DC Investment Partners came after
investment committee members heard a presentation in May 1998 by
principals Michael W. Devlin and Doctor Crants III. The presentation was
bolstered by the presence on DC fund's advisory board of names of
prominent Nashville business figures, including former Columbia/HCA
Healthcare Corp. executive Clayton McWhorter [Shares in DC fell 79% in
1999, while Metro investment in another alternate fund FCA Venture
Partners II earned $20 million on an $75 million initial investment in
start-up and early stage health care companies. DC was described as a
hedge fund, speculating on market swings. These funds are part of an
"alternative investments" category of venture capital and hedge funds that
have earned the system 29% (60M) last year and 18.47% annually over the
past 5 years.]
"The Employee Benefit Board's alternative investments in locally owned
venture capital funds, which invest in start-up companies, and hedge funds
have raised questions as far back as the administration of former Mayor
Phil Bredesen.
'There's a problem if you start making decisions based on who you know,
rather than what diversifies the portfolio best," Bredesen said.
Everybody knows X or Y or Z, and it's kind of easy to get in front of the
board with your investment. Unless you are really hard-nosed about not
doing it, there's always the temptation to do it with local people.'
McWhorter's association with DC Investment Partners made an impression on
the board. 'That was one of the deciding factors,' Ashworth (board
member) said. [PaineWebber, the financial firm that advises the board was
asked if it had any financial dealings with DC, subsequently confirmed,
therefore their advice could not be construed as independent.]
"The so-called 'alternative' investments are considered in a less formal
process: Parties who would like to get funding from the committee first
apply to PaineWebber and then appear before the committee [The Metro Pension
Board subsequently terminated the relationship with DC on 2/29/2000.]
Related article on p. 6A
Partners in Investment Fund Helped Found Prison REIT by Getahn Ward and
Thomas Goldsmith
[Devlin and Crants (a Nashville native and son of a co-founder of
Corrections Corporation of America) came to Nashville in 1996 from Wall
Street investment firm Goldman and Sachs. By the end of 1997 they had
started DC and attracted 300 clients (wealthy individuals and
institutional investors) and $550 million in assets. In July of 1997 they
had had formed Prison Realty Trust (an REIT traded on the NYSE, raising
$338 million).PRT bought CCA in 1999.]
"Investors found problems in the relationship between the two
companies, which shared top managers in several instances. Also, the
market for real estate investment trusts declined, as did Prison Realty
Trust stock.
Late last year, PRT announced a plan to restructure and revert to its
former name of CCA. Devlin and Crants were ousted when an investors group
offered to put as much as $350 million into the company. Late last week,
PRT's fourth-largest shareholder, Pacific Life Insurance Co., said it had
sent the company a rival restructuring plan to the earlier proposal, under
which the investors group would get an almost 40% stake in the company."
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Subject: Final Exam Employee Benefits Spring 2000 (fwd)
Answer each question thoroughly. If assumptions are necessary to complete
an answer, describe them. For any computations, use annual, end-of-year
periods and explain enough of your work so that I can duplicate your
answer. There is a two hour time limit. Write your name and mailing
address on the exam.
1) My employer contributes $7,000 per year into my defined contribution
plan. I just started to work for this employer; I am 55 and plan to
retire at age 70. Rather than a life expectancy, I plan a 5 year period
certain payout. Assuming a 7% growth rate, how much will I get per year
in the payout period?
2) After two years of retirement, Lorene was called by her former employer
and asked to come back to work on a part-time basis, which she is
considering. List the 5 most important questions you think Lorene should
clarify before she actually goes to work and explain why you think these
questions are important.
3) Given Washington's goal of containing health care expenditures through
its Medicare program (by limiting reimbursement levels to providers) and
employers' goals of containing health care costs on behalf of employees,
discuss these seemingly common goals. What impacts does each (the federal
government and private employers) have on the other? Where do these goals
conflict?--submitted by Gary Kushner
4) Describe three forms of health care fraud.
5) (a) Explain why pension system governance is one of the most important
issues emerging in this decade. [Fiduciary regulations are not what I'm
looking for in this answer.]
(b) If you were constructing a board for new Metro Nashville Plan, explain
who you think should be on the board, how they would be determined, why
you think your choices are important.
6) Assume Tennessee legislates that gay marriages are recognized on an
equal footing with heterosexual marriages. You are the benefits director
of a large employer and have been summoned by the CEO to explain the
potential implications. Itemize the most significant benefits
implications, explaining how they may be impacted.
7) A very good friend comes to you (a benefits expert) and reveals she is
filing for divorce, but doesn't yet want to notify her employer because
the HR director is the brother of her husband. Her primary concern is the
million dollars she has in her 401k account and the disposition of this
asset if her husband seeks a property settlement. She desperately needs
your opinion and has a copy of the plan document. What will you look for
in this document and why?
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Final Exam Employee Benefits Spring 2003
Answer all questions. Parts I and II are of approximate equal weights.
Part I:
Assume annual, end of year compounding. Show enough of your work in all
cases for me to duplicate any computational results.
1. Explain the difference between a discount rate and an earnings growth
rate.
2. If I have saved $100,000 in my 401k plan by age 67, then retire with a
life expectancy of age 79, and purchase an annuity at 7% interest, what
will be the total nominal dollar amount I will have received by the time I
am expected to die?
3. Consider an individual who is planning contributions to a 401k plan in
the following scenario. Assume annual, end-of-year compounding, a 5% rate
of return, retirement at the end of age 70, and a life expectancy of age
80.
From end of age 25 through end of age 34 $5,000 per year
From end of age 35 through end of age 44 no contributions
From end of age 45 through end of age 64 $15,000 per year
From end of age 65 through end of age 70 no contributions
Lump sum contribution at end of age 70 $25,000
What is the annuity during retirement?
4. Explain why the following are possible.
(a) Your new employer tells you that you cannot rollover your
401(k) assets from your previous employer's plan to the new employer's
plan.
(b) MTSU has a 401(k), 403(b), and a 457 plan.
5. The values for a defined benefit formula are: $500,000 * 3.0 * 40
What is the annuity?
6. To what kind of retirement plan(s) do the following phrases refer?
(a) substantial and recurring
(b) unfunded liability
(c) excess funding
7. Explain the significance of the following
(a) HCE vs. NHCE
(b) Sole and exclusive benefit of
8. What is the significance of the following ages with respect to
retirement?
(a) 62
(b) 65
(c) 67
(d) 70
(e) 70.5
9. What are two standard percentages I told you to use for actuarial
adjustments?
10. Case: Assume the only assets your parents have is $100,000 cash. One
is about to be admitted to a nursing home. Explain how Medicaid applies.
Part II
1. Draw and correctly label a graphic depiction of a labor market with a
highly elastic demand function and a highly inelastic supply
function. Illustrate and explain what happens when workers enter this
market.
2. Given our class discussion, graphically illustrate and explain how it
is possible that two separate wage rates can be maintained in comparable
labor markets.
3. How are the economic theory of value and the psychology of illusion
related in the context of benefits?
4. What is the name of the model drawn below? Correctly label the
relevant parts. Assume the subsidy is a pension for a 67 year old. What
kind of life will this person have if the pension is lost? Explain how
this is determined in the graph.
(graph not shown in online version)
5. What kind of model does the graph below illustrate? Correctly label
the graph and then illustrate and explain what happens if the benefits
costs decline.
(graph not included in this online version)