Make the Most of your Benefits Package

Make the Most of Your Benefits Package

Many employers offer a benefits package.  The most common benefits are health insurance and a retirement plans, topics I’ve covered in other posts.  Some benefits packages have other features, such as dental and vision insurance, various kinds of disability and life insurance and, in Canada, extended health care.

In this post, I’ll identify the parts of your benefits package for which you might have to pay a portion of the cost.  I’ll also provide a brief explanation of each and what you might consider as you decide whether to purchase them.  Employers often provide other offerings in their benefits packages, such as access to an Employee Assistance Program or medical advisors, at no cost.  Because you don’t need to make an election or pay for these benefits, they are not covered here but you’ll want to be sure you understand all pieces of your benefits package so you can take full advantage of them.

Dental & Vision Insurance in Your Benefits Package

There are many similarities in the coverage under dental and vision insurance.  In addition, the processes for deciding whether to buy them have a lot of parallels, so I’ll discuss them together.

Dental Insurance

Dental insurance pays for preventative dental services (usually two to four cleanings per year), a portion of other dental expenses (fillings, crown, root canals, for example) and sometimes orthodontia. The amounts of these expenses that are covered depend on the deductible, limits and coinsurance.

Every dental insurance plan I’ve had offered by employers has had a very low maximum limit, such as $1,500 or $2,500 a year.  This coverage differs from most other insurance products. Most other insurance products protect against things you can’t afford to lose, such as the injuries caused by a car accident or a tornado that destroys your home, and often have you pay for the “predictable” part through a deductible.

Vision Insurance

Vision insurance generally covers the basics – eye exams related to vision correction, glasses and contact lenses – and doesn’t usually cover more serious eye conditions.  Some eye conditions are considered medical in nature and are covered by health insurance. If you have an eye condition, I suggest contacting your health insurer to see if it is covered as a medical condition.

Networks of Providers

Many dental and vision insurers create networks of providers. My experience is that there are huge differences in coverage in and out of network, so you’ll want to see whether your providers are in the network before making any cost comparisons.

One year, my eye clinic was listed as being in network, but it turned out my specific eye doctor was not. As such, it might make sense to call your eye doctor’s office before selecting vision coverage to confirm that your specific provider is in your network.

Cost Comparison

Because dental and vision insurance have such low limits, they don’t provide much protection against large bills. As such, the decision to purchase them is primarily a comparison of your premium with your covered expenses. That is, you want to answer the question, “Will I recover more from the insurer than I pay in premium?”

Each year, I estimated my family’s dental and vision expenses by type.  For dental, I considered how many family members get regular cleanings, what the visits would cost and whether either of my children had braces. I ignored all other dental expenses, such as fillings or root canals, for this part of my analysis.  For vision, I counted the number of vision exams, pairs of glasses and contact lenses my family was likely to need.

I applied the deductibles, limits and coinsurance to the expenses to get an estimate of what I might recover from the insurer.  I compared that amount with the premium. My post on health insurance provides more information about networks, coinsurance and deductibles.

Other Considerations

Discounts negotiated by the dental insurer with providers are another component of savings.  Similar to health insurance, the cost of dental services provided by in-network providers when you have dental insurance can be significantly less than the cost if you don’t have insurance.  This savings is difficult to quantify initially, but you can estimate it once you have used the same provider under a single dental insurer for a year or two or you can call your dentist and ask about the savings. You can then include those savings in your analysis as a cost covered by the insurer.

You’ll want to research whether your health plan includes basic vision exams for you and your covered dependents.  If your health insurance plan has that coverage (and your provider is in your health insurer’s network which will likely be different from the vision insurer’s network), you’ll want to exclude any recoveries from the health insurer or exclude those expenses from your list before estimating recoveries from your vision insurer.

How to Decide

If the premium and amounts covered by the insurer were fairly close or the premium was less the amount I estimated I would recover (including savings from discounts), I would buy dental and/or vision insurance.  If the premium was significantly more than the covered expenses, I usually took my chances that no one would need any expensive dental work and didn’t make the purchase.   In practice, I bought dental insurance when my kids had braces and usually didn’t buy it otherwise.

As with all other financial decisions, the risk-reward trade-off is an individual one so you will need to decide for yourself how much extra premium you are willing to pay to have a portion of unexpected dental expenses reimbursed by the insurer.  As you do so, remember that there is likely a fairly low cap on the total coverage provided by the insurer, so you’ll want to see how much of that maximum you’ll use up with your preventative and orthodontia expenses in evaluating that risk-reward trade-off.

Many vision insurance plans do not cover anything other than preventative services, glasses and contact lenses.  As such, the decision to purchase vision insurance is often a more straightforward cost-benefit comparison and is less focused on risk and reward.  Of course, if your plan covers other eye issues, you’ll want to take those into consideration in your decision-making process.

Employee Stock Ownership as Part of Your Benefits Package

I have seen three types of employer offerings related to employee stock ownership. I talked about the first, allowing or requiring employees to purchase company stock in their defined contribution plans, in this post.  The second is an Employee Stock Ownership Plan or ESOP which is also a part of a defined contribution plan. The third, an Employee Stock Purchase Plan (ESPP), lets you buy company stock, often at a discount.

Employee Stock Ownership Plan (ESOP)

Under an Employee Stock Ownership Plan (ESOP), an employer contributes company stock to an employee’s defined contribution account.  (For more information about defined contribution plans, see my post on that topic.) The employee cannot sell the stock until he or she resigns or retires from the company, though there are exceptions.

If you want to diversify your company stock holdings, you’ll need to talk to your human resources representative to understand your options, if any.  ESOP contributions are usually subject to vesting (increased ownership by the employee as his or her tenure with the company increases). When the employee retires or resigns, he or she will either receive a lump sum or periodic payments, depending on the terms of the plan.

Employee Stock Purchase Plan

An Employee Stock Purchase Plan (ESPP) allows employees to purchase company stock through payroll deductions.  Many employers offer their company stock at a price lower than is available if purchased through a broker.  The ability to purchase the stock at a discount can be a real benefit, as long as the stock price doesn’t go any lower than your purchase price before you sell it.

ESPPs have varying rules as to how long you have to hold the stock before you can sell it. Also, the tax treatment may be differ depending on how long you hold the stock.   I preferred to have as little of my investments in my employer’s stock as possible. Therefore, I generally purchased stock through the ESPP, but sold it as soon as was allowed to lock in the benefit of the discounted purchase price.

There is a drawback to the approach I took.  If you seek to be a senior executive in a company, company stock ownership is often considered a sign of loyalty and faith in the company.  As such, if this is your goal, you might consider keeping the stock purchased through an ESPP.

Dependent Care Flexible Spending Accounts (US)

Dependent care flexible spending accounts (FSAs) allow you to set aside a portion of your paycheck without paying any taxes on the money. You must use the money to cover out-of-pocket expenses that are related to care of dependent children or parents and are needed to allow you to go to work.  You do not pay Social Security or Federal income taxes on money put into or withdrawn from a dependent care FSA. In many states, you also do not have to pay state income taxes either.

There are restrictions on the types of expenses you can pay from your account. You can generally pay for child daycare (both traditional daycare and nannies), elder care, before-and-after school programs and sick childcare services, among others.  If you plan to use the money for other services, you’ll want to confirm that they are acceptable. This publication from the IRS web site provides lots of details about who can qualify and the types of expenses that are acceptable.

You lose any money you contribute to a dependent care FSA if you don’t spend it in the same year.  For most people, the 2020 maximum contribution was $2,500 if you were single and $5,000 if you are married. That amount hasn’t changed in several years.  If your dependent care expenses are highly likely to exceed that limit, the tax savings make it reasonable to contribute the maximum.  If your expenses are likely to be less, you’ll need to take care in selecting the amount of your contributions so you don’t lose any portion you don’t spend.

Life Insurance Included in a Benefits Package

Many employers offer group life insurance on one or all of the employee, spouse and children.

Coverage

The type of life insurance offered by employers is term life insurance. It pays the stated benefit amount if the covered person dies during the policy period.  The policy period for an employer-sponsor plan often corresponds to a calendar year.

My employers generally provided life insurance on my life (as the employee) with a benefit amount equal to one year’s salary at no charge.  I was able to purchase more insurance on my life and smaller amounts on my spouse and children at my expense.

Exclusions

Group life insurance won’t provide the stated benefit if the cause of death is excluded from coverage. The most common exclusions with which I’m familiar are suicide and murder by the beneficiary.

If these nuances are important to your decision, you’ll want to ask your human resources representative what exclusions exist under your employer’s coverage. Much more importantly, if you are concerned about your mental health or your physical safety, please seek help! There are free crisis lines that will help with either issue or contact your local hospital for mental health concerns or police for safety issues.

How to Decide

Deciding whether to buy life insurance is often a tough decision, as we all like to think we will still be alive at the end of the year. We especially don’t want to think about what will happen if we or a loved one dies.  However, there are many people who should take advantage of this portion of their benefits package.   I offer some highlights of the decision-making process in the sections that follow, but refer you to my post on buying life insurance if you want more information.

How to Decide About Yourself

As you think about your coverage level, whether you have any dependents and, if so, whether they’ll be able to sustain their current lifestyle without your income and personal expenses are important considerations.  If you have no dependents and very little debt, you might not need more life insurance than one times your salary.  On the other hand, if you have children, have some or a lot of debt or are barely covering your expenses, you might want to buy more life insurance to make sure there is money to pay down your debts and/or support your children if you die.

You’ll also want to consider the cost of the life insurance and whether it fits in your budget. For more information on budgeting, see my introductory post and nine-part series with step-by-step details to create a budget, starting with this post.  If buying life insurance means that you don’t have enough money to cover the basics, you might need to take the riskier approach and not purchase life insurance or not purchase as much.

How to Decide About Your Spouse

The considerations for insuring your spouse are similar to buying insurance for yourself.  You’ll also want to consider whether your spouse’s employer provides any life insurance and, if so, compare the face amounts and premiums between the two plans.

How to Decide About Your Children

The amount of insurance available for the death of children is usually relatively low, in the range of $5,000 to $20,000.  I view the primary purpose of buying life insurance on children as covering funeral and related expenses. If you are able to afford a funeral and everyone who “should” attend can afford to get to the funeral, you are less likely to need life insurance on your children.  However, funerals and travel can be quite expensive, so life insurance on your children could cover some or all of those expenses. As always, you’ll want to evaluate whether the cost of life insurance on your children fits in your budget.

Disability Insurance

Disability insurance replaces a portion of your wages if you are sick or injured.  In the US, where workers’ compensation insurance covers workplace illnesses and injuries, disability usually covers only non-occupational illnesses and injuries. In other jurisdictions, it can cover both occupational and non-occupational illnesses and injuries.

Types of Disability Insurance

Employers offer wage replacement in a number of components, including sick time or paid time-off, short-term disability, long-term disability and supplemental long-term disability.

Sick Time or Paid Time-Off

Sick time or paid time off benefits usually pay you 100% of your wages when you are sick. There is often a limit on how many days of sick time you can take. More recently, vacation days are included in the limit and the total is called “Paid Time-Off.”

Short-Term Disability Insurance

After a stated waiting period called an elimination period, short-term disability insurance will replace some or all of your wages.  I have seen short-term disability plans that pay between two-thirds and 100% of wages (excluding bonus) for between 13 and 26 weeks. I have never had an employer charge me for short-term disability insurance, but imagine some employers might do so.

Some governments outside the US, including Canada, offer programs similar to short-term disability.  If your employer requires that you pay some or all of the premium for a short-term disability program, I suggest you research the benefits provided under any government program in your decision-making process.

Basic Long-Term Disability Insurance

After you have exhausted your short-term disability benefits, you may be eligible for long-term disability benefits if offered by your employer.  The basic long-term disability plans I have seen have paid between 50% of salary and two-thirds of the sum of salary and target bonus. Some long-term disability plans provide benefits for only a limited number of years while others will provide benefits until your normal retirement age.  In all cases, benefits stop, of course, if you recover and are able to return to work. I’ve had employers pay the full cost of basic long-term disability and others that required that I cover a portion of its cost. If you pay some or all of the premium for long-term disability insurance, the corresponding portion of any benefits you receive are not subject to income taxes, at least in the US.

Supplemental Long-Term Disability Insurance

Some employers give you the option to increase the percentage of your income that is replaced by long-term disability at your expense.

How to Decide

The decision whether to purchase any optional disability coverage depends on two key aspects of your financial situation. Are you able to support yourself and your family if you are ill or injured for a long time? Does the cost of the disability insurance fit in your budget?

At one (pretty unlikely) extreme, you don’t need to buy additional coverage because you have enough savings for retirement, any children’s education and maintaining your current lifestyle or you can live on just your spouse’s income for an extended period of time.  At the other extreme, you might find it difficult to afford disability insurance. In that case, you probably are also in the greatest need of it as one missed paycheck could be devastating financially. As such, the decision to purchase disability insurance is a balance between your need for the coverage in case you can’t work, your likelihood of having an accident or becoming serious ill, and your ability to pay the premium.

Accidental Death & Dismemberment Insurance

Accidental Death & Dismemberment Insurance (AD&D) provides additional life insurance if you die in an accident. It also pays you a percentage of the face amount of the policy if you lose or lose use of a body part, such as an arm, a leg or an eye.  Many employers offer this coverage. Some charge for it while others do not.

Business travel accident insurance is a form of AD&D that provides coverage only if you are traveling for business when the accident occurs.  Some policies also provide coverage if the accident occurs on the employer’s premises. Most employers do not charge for this coverage, but some may.

How to Decide Whether to Buy AD&D

I generally did not buy AD&D coverage, though obviously didn’t opt out of it when my employer covered the full cost. I had a desk job for my whole career, so could have gone back to work with at least some amount of disability.

If you have a career that is more physical, you’ll want to think about what injuries would make you permanently unable to pursue your current profession. You’ll want evaluate the amount of benefit that would be provided in case of loss or loss of use of a body part.  If your employer’s policy covers accidents in the workplace, you’ll also want to consider whether your workplace is dangerous, such as a manufacturing facility or an oil well, and, in the US, any recoveries you might receive from workers’ compensation insurance. As always, you’ll want to evaluate the potential benefits of this coverage in your specific situation relative to the cost of the insurance and whether it fits in your budget.

Group Legal Benefit

Some employers offer a group legal benefit either at their or the employee’s expense.  Features of this component of a benefits package can include:

  • A discount on legal representation.
  • Telephonic legal advisory.
  • On-line tools.
  • Other free or reduced-fee services.

I’ve never paid much attention to a group legal benefit, as I considered any legal expenses in my budgeting process and have been very fortunate that I have only had very predictable legal expenses (such as writing wills).

If you anticipate that you might need legal advice, it would make sense to estimate the value of any benefits your employer provides and compare them with the cost charged by the employer.  Even having a will written if you have dependent children can be quite expensive, so the value of the discount might be enough to justify the cost.

Extended Health Care Insurance (Canada)

In Canada, many of the basics of healthcare are provided through the government health plan.  However, many important expenses are not covered, including prescription drugs, medical devices (e.g., crutches, wheelchairs and orthotics), various practitioners (e.g., chiropractors, physiotherapists and psychologists) and many other types of medical expenses.

Extended health care insurance covers a portion of these costs, with the portion and specific costs covered varying from plan to plan. Some plans include dental and vision coverage, the portion of ambulance services not covered by provincial insurance, and semi-private hospital rooms.  The insurance includes many of the same coverage features (limits, deductibles, coinsurance) used in US health insurance. If you are considering the purchase of extended health care insurance, I suggest that you read my Health Insurance post, excluding the sections on HealthCare Flexible Savings and Health Savings Accounts.

Acknowledgements

I want to thank Laura Kenney for her invaluable help with making sure I clearly explained these aspects of a benefits package.

Investment Options in Retirement Savings Plans

Investment Options in Retirement Savings Plans

All investment decisions are a trade-off between risk and reward. In this post, I’ll focus on how risk and reward affect your decision among the investment options in your employer-sponsored retirement plans.

If you look at returns over very long periods of time, well diversified, riskier investments tend to produce higher returns with lower risk. For most of these investments, “a very long period of time” is somewhere between 10 and 30 years. That doesn’t mean that the riskiest investments will always outperform the less risky investments in every 10 or 20 year period, but, if you look at enough of them, they generally will on average.

When I Take More Risk

Very briefly, three characteristics I use to help decide whether I want to lean towards a more or less risky investment are:

    • With only a small amount to invest, I will tend to be purchase less risky investments than if I have a larger amount because I have less of a cushion and I want to protect it.
    • When I know I will need the money very soon, I invest in less risky investments (or possibly keep it in a savings or checking account). With longer time periods, riskier investments have more time to recover if they have a large decline. If I need the money soon, I might not have enough money for my purchase if the values declined.
    • If I have almost as much money as I need for a purchase that isn’t going to be made for a while (for example when I had enough money saved for my children’s college education), I will purchase less risky investments as I don’t need a high rate of return to meet my objectives and also want to protect my savings.

     

  • If you aren’t comfortable with the concept of risk, I suggest looking at my post on that topic.

    Common Choices

    Commonly available investment options in employer-sponsored retirement plans are listed below. I have put them in an order that roughly corresponds to increasing risk.

    • Money market funds – Money market funds invest in what are considered short-term, liquid (easily sold) securities. They are similar to, but slightly riskier than, interest-bearing savings accounts.
    • Stable value funds – A stable value fund usually buys and sells highly-rated corporate or government bonds with short to intermediate times to maturity. The return on a stable value fund is the sum of the changes in the market value plus the coupon payments on the bonds held by the fund.   Because stable value funds tend to buy bonds with shorter times to maturity than typical bond mutual funds, they often have lower returns and be less risky.
    • Bond Mutual Funds – Bond mutual funds buy and sell bonds. The return on a bond mutual fund is the sum of the changes in the market value plus the coupon payments. Although they don’t track exactly, the market values of bonds tend to go down when interest rates go up and vice versa.
    • Large Cap Equity Mutual Funds – These funds buy and sell stocks in large companies, often defined as those with more than $10 billion of market capitalization (the total market value of all the stock it has issued).
    • Small Cap Equity Mutual Funds – These funds buy and sell stocks in smaller companies.
    • Foreign Equity Mutual Funds – These funds buy and sell stocks in foreign companies. Every foreign equity fund is allowed to define the countries in which it invests.   You’ll want to look to see in what countries your fund options invest to evaluate their level of risk.
    • Emerging Market Equity Mutual Funds – These funds buy and sell stocks in companies in countries that are considering emerging markets. Morocco, the Philippines, Brazil and South Africa are examples of currently emerging markets.
    • Retirement Date Funds – These fund managers buys bond mutual funds and equity mutual funds.  Each fund has a range of retirement dates associated with it.  The fund manager selects the allocation between bond funds and stock funds based on its evaluation of the amount of mix you should take given the length of time to retirement.  The key advantage of a retirement date fund is that you don’t have to make any decisions – the fund manager does it all.  The disadvantages of retirement date funds include the fact that they ignore your personal risk tolerance, they don’t consider other assets you may own outside the retirement date fund and some of them have fairly high fees, since the retirement date fund manager receives a fee on top of the fees charged by the mutual funds selected by the fund manager.

    Other Choices

    Some employers offer index funds which are variations on equity mutual funds. An index fund’s performance tracks as closely as possible to a major stock market index. The Dow Jones Industrial Average, the Standard & Poors (S&P) 500 or the Russell 2000 are examples of indices. The first two indices have risk and return characteristics somewhat similar to large cap equity mutual funds. The Russell 200 is more closely aligned with a medium or small cap equity mutual fund.

    Increasingly, employers are offering Target Retirement Date Funds as an option. The fund manager not only selects the individual securities that will be owned by the fund, but also chooses the mix between equities and bonds.   In theory, the number of years until the target retirement dates for that fund determines the mix of investments. For example, a fund with a target retirement date range of 2021 through 2025 might be invested more heavily in bonds than a fund with a target retirement date range of 2051 through 2055. People who are close to retirement are often more interested in protecting their investments (i.e., want less risk). On the other hand, people who don’t plan to retire for many years are often more willing to take on additional risk in exchange for higher returns. You can accomplish the same mix yourself using bond funds and equity funds, but some people prefer to let the fund manager make that decision.

    Some employers allow or require you to invest in company stock in their defined contribution plans. Many of these employers consider an investment in the company’s stock as an indication of loyalty. I view it as a very risky investment option. I discuss the benefits of diversification in this post. If your investment portfolio is diversified, it means that a decline in value of any one security will not adversely impact the total value of your portfolio too severely. If you purchase your employer’s stock, you are investing in a single company rather than investing in the larger number of companies owned by a mutual fund. In a really severe situation, you could lose your job and the stock value could drop significantly, leaving you with much smaller savings and no salary. As such, you take on much less risk if you select a mutual fund than company stock.

    How I Decided

    As I made my 401(k) investment selections, I thought about what other investments I had, if any, and used the 401(k) choices to fill in the gaps. That is, I used my 401(k) investment selections to increase my diversification. When I was young, I selected two or three funds that had US exposure to each of small and large cap equities. As I had more money both in and out of my 401(k), I still selected two or three funds, but invested in at least one fund with foreign or emerging market exposure to further diversify my holdings.

    Fine Print

    As a reminder, I am not qualified to give investment advice for your individual situation. Nonetheless, I can provide insights about the types of investment options I’ve seen in employer-sponsored retirement plans. I’ll describe the characteristics of most of these investment vehicles in more detail in later posts, but want to touch on them now as many of you will be making employee benefit elections before then.