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Benefits Drive Business Strategy

Rocke Blair, CEBSManaging Partner

Fiduciary Analytics, LLCWest Chester, Ohio

3B-1

The Cost of Business is Increasing

Source: “Six Pillars of HR Excellence”--Paycor

3B-2

The Cost of Business is Increasing

Managing Business Risk Buckets

Property & Facilities

Financial Risk

Cyber-Security

Environmental Risk

Innovation Operational Risk

HumanCapital

Cost of business is number one concern of employers—” Plan Sponsor Insights”, 2017; Fidelity Investments

3B-4

The Cost of Labor is Increasing

Educated workforce unemployment rate is low

Unemployment rate down, wages up Civilian working population decreasing

Labor force participation is declining

Source: J.P. Morgan Asset Management, Census Bureau

3B-5

Real Compensation vs. Real Earnings

Business Sector: Real Compensation

Average Hourly Earnings

3B-6

Three Rs of Workforce Management

RetireRecruit Retain

Early Career Mid Career Retirement

Productivity

TotalCompensation

Desired Projected Retirement Retirement

3B-7

38%of workers expectto retire at age 70

or beyond.

Employee Benefit Research Institute, March 2017

Employees are not Ready for Retirement

3B-8

If employees cannot retire*:• Mid-career talent leaves,

• Productivity may go down,

• Benefit and compensation costs increase

Total Compensation

To Retire

To Recruit and Retain

Disability

Paid Time Off

Retirement

*A retirement program is the only benefit plan that manages age

*Levanon, Gad, Ben Cheng, and Jeremy Goldman. "U.S. Workers Delaying Retirement: What Businesses Can Learn from the Trends ofWho, Where, and Why." The Conference Board, ExecutiveAction Series 350 (2011): page, 8.

Why Do We Sponsor Retirement Plans?

3B-9

The Impact Increases with AgeExpense Average new hire1 Average retirement

age2Marginal difference

Average age 38 Years 65 Years

Wages $60,200 $84,480 $24,280

Healthcare $4,870 $11,219 $6,349

Worker'scompensation

$2,689 $6,121 $3,432

Other3 ? ? ?

Total $67,759 $101,819 $34,061

1. Average new hire age, wages and benefit costs are the average of all company employees ages 25-50 in the workforce.2. Average retirement age, wages and healthcare costs are the average of all company employees ages 62-70 in the workforce3. Other: costs not included are productivity, absenteeism, turnover costs, PTO, statutory benefits, etc.

3B-10

Financial Precarity Hurts Workers and Organizations

HighExpense

LowExpense

Conditions

Low Financial Resources

High Financial Resources

Working Memory

Meuris, J., Leana, C. (2015). The high cost of low wages: Economic scarcity effects in organizations. Research in OrganizationalBehavior, 35: 143-158.

3B-11

Employees Are Retiring Later Impact on Benefit Costs

AgeBeginning headcount

Expected retirements

Delayed retirement

Early retirement savings

Delayed retirement costs

Total retirement savings

Total retirement costs

Potential liability

62 11 1.5 9.5 $100,791 $151,187 ($151,187)

63 12 1.4 10.6 $67,971 $95,159 ($95,159)

64 11 2.0 9.0 $34,380 $34,380 $68,760 $309,420 $240,660

65 13 5.8 7.2 $34,380 $247,536 $247,536

66 12 1.4 10.6 $34,380 $364,428 $364,428

67 12 2.7 9.3 $34,380 $319,734 $319,734

68 9 2.4 6.6 $34,380 $226,908 $226,908

69 11 5.0 6.0 $34,380 $206,280 $206,280

70 10 10.0 0.0 $- $- $-

101 32.2 68.8Net Potential

Liability$1,359,200

* Employer first-year delayed retirement costs—hypothetical example for illustrative purposes only* This model uses probability-based retirement estimates to predict future employee behaviors and potential related employer costs* Actual net potential liability (using parameters to eight decimal places) is $1,356,700* At age 64, there are both savings for employees who retire and costs for employees delaying retirement* All employees 70 years and older at the beginning of the year are automatically retired with no projected liability applied

3B-12

Source: Allianz Artificial Intelligence: Big Data https://www.allianzgi.com/en/insights/artificial-intelligence/ai-data

3B-13

Disruptive Innovation to Improve Health, Control Costs and Mitigate Risk

#shifthappens

New WorldOld World

Customer impact+ Demographic data+ Behavioral data+ Financial data

3B-14

Starting Point for a 3,000 Employee Industrial Company

The Company’s hiring strategy has created a

bolus of employees who are nearing retirement age.

The number of employees at or

beyond retirement age has been growing.

54

204243 242

307

448492 503

343

132

282 2

0

100

200

300

400

500

600

20 40 60 80

Head

coun

t

Age

3B-15

Disruptive Innovation to Improve Health, Control Costs and Mitigate Risk

$0

$10,000

$20,000

$30,000

$40,000

20 30 40 50 60 70 80

Age

y p y g

27 Employees over $40,000 are shown on the $40,000 line

Slope 5.5%:

For each year that employee ages, their health benefits cost

paid by the employer increases 5.5% than the prior

year.

“Taming the hungry tape worm” —Warren Buffett

20

40

60

80

100

120

20 40 60 80

Read

iness

Age

Slope -1.5%:

For each year that an employee ages, he/she is

1.5% less ready to retire than the prior year.

Unfunded liability tied to the cost of those delaying retirement

3B-16

Avg PMPM pharmacy spend is half of the SmartCohort

The avg medical spend is less expensive than SmartCohort

~$60 PMPM

Pharmacy spend vs. Benchmark & SmartCohort

~$330 PMPM

Medical spend vs. Benchmark & SmartCohort

Disruptive Innovation to Improve Health, Control Costs and Mitigate Risk

“Taming the hungry tape worm” —Warren Buffett

3B-17

Age is the primary driver of risk

“U.S. News Health Care Index Shows Massive Increase in Consumer Costs” “Workers compensation rates for

employers likely to increase”

“How Do We Deal With Rising Drug Costs?” “Defuse this city pension bomb”

Organizational Financial Performance Relies on Successfully Managing Demographic Trend

“Taming the hungry tape worm” —Warren Buffett

3B-18

The five year net present value of unfunded liability due to retirement delays is $18M

for this 3,000-employee company.

How Did a 3,000-employee Industrial Company React to This Insight?

• HR – total HR strategy is under review, including hiring, training, retention, safety, retirement planning, etc.

• Benefits – benefit plan design to drive cost savings to support financial wellness

• Retirement – employer-match & profit-sharing incentives support financial wellness initiatives, such as credit consolidation, emergency funds

• Financial – cost/benefit scenarios to assess impact on retention, training, retirement, benefits, safety, etc.

• C-Suite Alignment – building an integrated HR – Finance plan based on quantified and measurable risk metrics

Financial Impact of the Integrated Risk

3B-19

Correlative Analytic Methodology

‐ 180 ‐ 90 ‐ 60 ‐ 30 + 30 + 60 + 90 + 180

Trigger Event

401(k) loan, withdrawal, or deferral decrease

Correlative Impacts

Safety event occurring prior to, or subsequent to, Trigger Event

#dataisgold

3B-20

0 50 62 7065

Rx Savings

Initial Liability $42M

Wellness

Today’s Liability $18M

Years

Four

Cost

Age

Disease Management

Predictive Analytics

Absence Management & Safety

(14% ROI)

Case Study3000 Employee Industrial Implementation Analysis

3B-21

Key Takeaways• Create a common language with Finance

– Data, analytics and insights– Quantifiable results

• ROI• Savings

• Have a common source of truth– Real, actionable data– No more guess work

• Actionable intelligence– Income statement impact– Balance sheet impact

3B-22