Employer-Sponsored Health and Retirement Benefits: Efforts to	 
Control Employer Costs and the Implications for Workers 	 
(30-MAR-07, GAO-07-355).					 
                                                                 
Many U.S. workers receive health and pension benefits from	 
employers, and the cost of these benefits represents a growing	 
share of workers' total compensation. Employers have made changes
to control these rising costs, contending that these changes will
allow them to remain competitive, particularly in an increasingly
global market. Some advocacy groups are concerned that workers	 
may receive reduced benefits or incur additional costs as a	 
result of employers' cost-control strategies. Moreover, they	 
contend that these changes may disadvantage certain groups of	 
workers, such as sicker, older, or low-wage workers. GAO was	 
asked to examine the practices employers are using to control the
costs of benefits. To evaluate changing employer benefit	 
practices and their potential implications, GAO examined: (1)	 
current and emerging practices employers are using to control the
costs of health care benefits; (2) current and emerging practices
employers are using to control the costs of retirement benefits; 
and (3) employers' workforce restructuring changes. GAO reviewed 
studies of employer benefit trends; interviewed representatives  
of business, government, labor, and consumer advocacy and	 
research organizations; and reviewed and analyzed data from	 
surveys of employee benefits. The Department of Labor provided	 
technical comments, which were incorporated as appropriate.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-355 					        
    ACCNO:   A67570						        
  TITLE:     Employer-Sponsored Health and Retirement Benefits:       
Efforts to Control Employer Costs and the Implications for	 
Workers 							 
     DATE:   03/30/2007 
  SUBJECT:   Compensation					 
	     Cost analysis					 
	     Employee benefit plans				 
	     Employee medical benefits				 
	     Employee retirement plans				 
	     Employees						 
	     Health care cost control				 
	     Private sector practices				 
	     Retirement benefits				 

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GAO-07-355

   

     * [1]Results in Brief
     * [2]Background

          * [3]The U.S. System of Employer-Sponsored Health and Retirement
          * [4]Evolution of Employer-Sponsored Health Benefits
          * [5]Types of Employer-Provided Retirement Benefits
          * [6]Workforce Restructuring
          * [7]Key Legal Protections for Workers and Retirees

     * [8]Recent Changes in Employer-Sponsored Health Benefits Prompte

          * [9]Fewer Small Employers Offered Health Benefits
          * [10]Many Employers Changed the Design of Health Benefit Packages

               * [11]Shifted More Responsibility for the Costs of Health
                 Benefits
               * [12]Introduced New Health Plan Options
               * [13]Offered Health and Wellness Programs

          * [14]Employers Continued to Offer Retiree Health Benefits, but Sh
          * [15]Certain Recent Changes in Employer-Sponsored Health Benefits

     * [16]The Ongoing Shift to Different Types of Employer-Sponsored R

          * [17]Participation in Traditional Defined Benefit Plans Decreased
          * [18]Participation in Defined Contribution Plans Continues to Inc
          * [19]Some Workers Participate in Both Defined Benefit and Defined
          * [20]Employers' Retirement Plan Decisions Reflect Their Preferenc
          * [21]Employer Decisions May Affect Worker Roles in Retirement Pla

     * [22]Workforce Restructuring Can Result in Different Benefit Arra

          * [23]Fewer Contingent Workers Participate in Employer-Sponsored B
          * [24]Employers' Use of Contingent Workers Can Affect Benefit Cost

     * [25]Concluding Observations
     * [26]Agency Comments

          * [27]Private Surveys of Employer-Sponsored Health Benefits
          * [28]Private Surveys of Employer-Sponsored Pension Plans
          * [29]Federal Surveys

     * [30]GAO Contacts
     * [31]Acknowledgments
     * [32]GAO's Mission
     * [33]Obtaining Copies of GAO Reports and Testimony

          * [34]Order by Mail or Phone

     * [35]To Report Fraud, Waste, and Abuse in Federal Programs
     * [36]Congressional Relations
     * [37]Public Affairs

Report to the Chairman, Committee on Education and Labor, House of
Representatives

United States Government Accountability Office

GAO

March 2007

EMPLOYER-SPONSORED HEALTH AND RETIREMENT BENEFITS

Efforts to Control Employer Costs and the Implications for Workers

GAO-07-355

Contents

Letter 1

Results in Brief 3
Background 5
Recent Changes in Employer-Sponsored Health Benefits Prompted by Cost
Concerns May Particularly Affect Lower-Wage and Less Healthy Workers 17
The Ongoing Shift to Different Types of Employer-Sponsored Retirement
Plans Continues to Affect Both Employers' and Workers' Roles in Retirement
Planning 28
Workforce Restructuring Can Result in Different Benefit Arrangements for
Workers and May Affect Employer Benefit Costs 37
Concluding Observations 41
Agency Comments 43
Appendix I Description of Survey Data Used in Our Analysis 44
Appendix II GAO Contacts and Staff Acknowledgments 48
Related GAO Products 49

Tables

Table 1: Percentage of Firms Offering Health Benefits by Firm Size, 2001
and 2006 18
Table 2: Change in the Share of PPO-Enrolled Workers with Selected
Cost-sharing Arrangements, 2004 and 2006 19
Table 3: Share of Employers with over 500 Workers That Offer Health and
Wellness Programs, 2001-2005 22
Table 4: Percent of Surveyed Private-Sector Employers with 1,000 or More
Workers That Made Cost-Shifting Changes to Their Retiree Health Benefits
in the Previous Year 23
Table 5: Percentage Point Change in Rates of Employer Sponsorship of
Health Benefits, and Worker Eligibility, Enrollment, Coverage, and
Uninsurance, 2001-2005, by Income Level, Based on the Federal Poverty
Level (FPL) 25
Table 6: Employer-Sponsored Defined Benefit Plans and Active Participants,
1985, 1999, and 2003 29
Table 7: Employer-Sponsored Defined Contribution Plans and Active
Participants, 1985, 1999, and 2003 31
Table 8: Percentage of Part-time Workers Participating in
Employer-Provided Pension and Health Care Benefits, 1999 and 2005 40
Table 9: Hourly Cost of Retirement and Health Care Benefits for Full-time
and Part-time Workers, 2005 41

Figures

Figure 1: Real Growth in Hourly Expenses Attributable to Wages, Health and
Retirement Benefits, and Other Benefits between 1991 and 2005 7
Figure 2: Composition of the Contingent Workforce (February 2005) 13
Figure 3: Share of Workforce Participating in Employer-Sponsored
Retirement Plans, by Type of Plan 1985-1999 32
Figure 4: Percentage of Full-time and Contingent Workers Offered
Employer-Provided Pension and Health Care Benefits, 2005 38
Figure 5: Percentage of Full-time and Contingent Workers Participating in
Employer-Provided Pension and Health Care Benefits, 2005 39

Abbreviations

ADA Americans with Disabilities Act of 1990
ADEA Age Discrimination in Employment Act of 1967
BLS Bureau of Labor Statistics
CDHP consumer-directed health plan
CPS Current Population Survey
DB defined benefit
DC defined contribution
DOL Department of Labor
ERISA Employee Retirement Income Security Act of 1974
FASB Financial Accounting Standards Board
FPL Federal Poverty Level
HIPAA Health Insurance Portability and Accountability Act of 1996
HMO health maintenance organization
HRA health reimbursement arrangement
HRET Health Research and Education Trust
HSA health savings account
IRA individual retirement account
PBGC Pension Benefit Guaranty Corporation
PEO Professional Employer Organization
PPA Pension Protection Act of 2006
PPO preferred provider organization
PSCA Profit Sharing/401k Council of America

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separately.

United States Government Accountability Office
Washington, DC 20548

March 30, 2007

The Honorable George Miller
Chairman
Committee on Education and Labor
House of Representatives

Dear Mr. Chairman:

Many workers receive health and retirement benefits from their employers,
and the cost of these benefits in recent years has risen faster than
wages.^1 Between 1991 and 2005 the costs of health and retirement benefits
increased by 34 percent compared to a 10 percent increase in wages.
Employers have made changes to control the rising costs of these benefits,
contending that these changes will allow them to remain competitive,
particularly in an increasingly global market, by balancing cost
containment with the need to offer attractive benefits. Some consumer
advocacy groups and union representatives are concerned that workers may
receive reduced benefits or be required to absorb these rising costs as a
result of employers' cost control strategies. Moreover, they are concerned
that cost control strategies may disadvantage certain groups of workers,
such as those who are sicker, older, or low-wage earners.

Although changes to control rising benefit costs are not limited to a
particular industry, changes considered by industries that employ large
numbers of workers, such as manufacturing and retail, have received
widespread publicity and prompted public debate on the role of
employer-sponsored benefits in the United States. For example, an internal
Wal-Mart memo that was released to the media in late-2005 described
several proposed benefit changes that some labor and advocacy
representatives thought would disadvantage certain low-wage workers. The
strategies adopted by employers to control rising health and retirement
benefits costs and the sustainability of employers' continued ability to
provide the benefits has significant implications for workers. Such
strategies also have implications for the federal government, which plays
a key role in financing these benefits through favorable tax treatment to
employers that provide these benefits and to individuals directly through
certain federal programs.

^1 See GAO, Employee Compensation: Employer Spending on Benefits Has Grown
Faster Than Wages, Due Largely to Rising Costs for Health Insurance and
Retirement Benefits, [38]GAO-06-285 (Washington, D.C.: Feb. 24, 2006).

You requested that we examine certain practices employers are using to
control the costs of benefits. To evaluate changes in employer benefits
and their potential implications, we examined:

           1. current and emerging practices employers are using to control
           the costs of health care benefits and the potential implications
           of these changes;
           2. current and emerging practices employers are using to control
           the costs of retirement benefits and the potential implications of
           these changes; and
           3. employers' workforce restructuring changes that may affect
           health and retirement benefit costs and the potential implications
           of these changes.

To examine the extent to which employers have changed health or retirement
benefits and restructured their workforces, we obtained and reviewed
published studies examining trends in employer benefits, particularly
employer strategies to contain rising benefits costs. We interviewed
individuals representing many perspectives on this issue, including
benefits consultants, labor union and industry representatives, consumer
advocates, academic and policy researchers with expertise on
employer-sponsored benefits, and officials from the U.S. Department of
Labor (DOL). We also reviewed and analyzed data from several surveys that
are conducted annually, including two nationally representative surveys of
employers' health benefit plans, one national survey on the retiree health
benefits offered by large private-sector employers, and two large federal
surveys that address employer-sponsored health and retirement benefits. In
addition, we reviewed relevant federal laws and regulations. We also
reviewed and analyzed data from employers' required annual filings on
their retirement plans with federal agencies such as DOL and with the
Pension Benefit Guaranty Corporation (PBGC). We assessed the reliability
of the data from these surveys and determined that the data were
sufficiently reliable for the purposes of our study. Our analyses of
changes in employer benefit practices focused on the most recent years of
data available. The analysis of health benefits focused primarily on years
2001 through 2006. Our analysis of changes in private employers'
retirement benefit plans and participation focused primarily on years 1999
through 2003. Our analysis of changes in the composition of employers'
workforces focused primarily on years 1999 through 2005. Because we relied
on existing survey data to measure the extent of changes in employee
benefits, this report may not address certain changes that may have
occurred very recently or are not widespread. (See app. I for a detailed
description of survey data we reviewed and analyzed.) For a list of
related GAO products see the end of this report. We performed our work
from April 2006 through February 2007 in accordance with generally
accepted government auditing standards.

Results in Brief

Many employers have recently changed employee health benefits, often to
control costs, and some of these changes may particularly affect
lower-income and less healthy workers. Overall, the share of employers
offering health benefits has declined from 2001 to 2006, due mostly to an
8-percentage point drop in the share of small employers offering benefits.
Among employers that offer health benefits, many have changed plan design
features or begun offering different types of health plans to control
costs. For example, employers have shifted additional responsibility for
health care costs to workers in the form of increased deductibles,
co-payments, and coinsurance that employees must pay out-of-pocket, and
some have recently introduced consumer-directed health plans (CDHP), which
trade lower premiums for significantly higher deductibles. Also, some
employers are beginning to offer mini-medical plans that provide more
limited coverage at lower premiums. These plans may benefit low-wage
workers who were previously uninsured, but may also represent erosion in
coverage where they replace more comprehensive plans. In addition,
regarding retiree health benefits, the share of employers that offer
benefits to current retirees has remained relatively stable in recent
years, although similar to active workers, employers have shifted
additional costs for these benefits to retirees. In addition, many
employers have terminated benefits for future retirees, and experts
believe this trend will continue. Some of these recent changes to health
benefits may particularly affect low-wage workers who are less able to
afford higher out-of-pocket costs, and less healthy workers who use more
health services. Survey data indicate that from 2001 through 2005,
eligibility for health coverage and the extent to which workers are
covered have both declined most among low-wage workers.

With regard to retirement benefits, the changes that employers are making
to their pension plans represent a continuation of trends that have
emerged over the last several decades. The number of defined benefit (DB)
plans and the percentage of active workers participating in these plans
have decreased over the past several decades, while defined contribution
(DC) figures have risen.^2 In 1985, there were approximately 29 million
active participants in about 170,000 DB plans. In 2003, these numbers had
declined to 21 million active participants in about 47,000 plans. Of the
remaining DB plans, some are hybrid plans--sharing characteristics of both
DB and DC plans--a trend that may increase in response to recent
legislation. In contrast to DB plans, the number of DC plans and active
participants in these plans has generally continued to increase. In 1985,
there were approximately 33 million active participants in over 460,000 DC
plans, which increased to 52 million active participants in over 650,000
plans in 2003. Some workers participate in both types of plans. Benefit
experts stated that employers' decisions on what type of retirement plans
to offer reflects their preference for retirement benefit cost control and
funding and accounting predictability. However, employers' decisions
affect worker roles in retirement planning. With DC plans, workers assume
the responsibilities and risks for managing their retirement accounts. A
growing number of employers are attempting to increase participation rates
and retirement savings in DC plans by automatically enrolling workers and
offering new types of investment funds, and may take advantage of
flexibilities available under recent legislation by offering workers
investment advice.

Workforce restructuring through the use of contingent workers--workers
that are not employed full-time and year round with a single employer--may
affect workers' access to and participation in employer-sponsored benefit
programs. For example, contingent workers are not offered and do not
participate in employer-provided pension and health care benefits to the
same extent as full-time workers. In 2005, 64 percent of full-time
private- and public-sector workers participated in employer-provided
pension plans and 72 percent participated in employer-sponsored health
plans, compared to only 17 percent and 13 percent of contingent workers,
respectively. The use of contingent workers can reduce employers' costs
associated with providing these benefits; however, benefits experts
presented mixed views on whether employers have been changing the
composition of their workforces for this reason.

^2 DB pension plans are funded by employers and typically provide periodic
payments to retirees beginning at retirement age that are based on a
formula that considers participant pay, age, and years of service. DC
plans are individual worker accounts to which employers and workers can
make contributions, with the amount available for retirement dependent
upon accumulated contributions and investment returns over the course of
the period leading up to retirement.

The responsibilities of employers and workers in financing health care and
retirement benefits continue to evolve in an increasingly competitive
global market. Changes in benefit design that shift more of the cost,
risk, and control to workers may help employers control their benefit
costs and provide greater benefit choices for some workers; however, such
changes have other consequences. The challenges workers face can make it
more difficult for low-wage earners to afford health care coverage and
save for retirement. Although these challenges may weigh most heavily on
the less wealthy and less healthy segments of the workforce, they affect a
broad spectrum of the American workforce and could prove challenging to
many. Employers, individuals, and the government share the responsibility
for providing a U.S. benefits system that addresses the health and
retirement needs of individuals of varying economic and health
backgrounds, while allowing employers to remain competitive in a global
market environment.

We provided a draft of this report to DOL. DOL did not provide written
comments, but did provide technical comments, which we incorporated as
appropriate.

Background

Many U.S. workers participate in employer-sponsored health benefit and
retirement pension programs and the costs of these benefits in recent
years have risen faster than wages. The designs of these benefit programs
have changed over the course of the past several decades, and these
changes have often been made in response to growing costs associated with
providing the benefits. Millions of workers are not in traditional
full-time, year-round work arrangements and some may legally be excluded
from benefit plans that are offered to full-time workers. Employers are
not required to offer health and retirement benefits to any workers,
although when they are offered, federal laws provide some protections to
workers related to their provision.

The U.S. System of Employer-Sponsored Health and Retirement Benefits

The U.S. system of employer-sponsored health and retirement benefits is
financed by employers, individual worker contributions, and state and
federal governments through foregone tax revenue. The degree to which
individuals rely on employer-sponsored health care and retirement benefits
depends on several factors, including age, income, employment status, and
access. In addition to wages and other benefits, employers often provide
workers with health and retirement benefits as a part of their total
compensation. Employer-sponsored health benefits provide coverage to over
155 million individuals through coverage of active workers and their
dependents.^3 Employers may also provide health benefits to
Medicare-eligible retirees and individuals who retire prior to their
eligibility for Medicare (typically referred to as early retirees) and
their dependents. Approximately 12 million retirees on Medicare and 3
million early retirees are covered under employer-sponsored health
benefits.^4, 5 About half of all private-sector workers participate in an
employer-sponsored retirement plan according to the Bureau of Labor
Statistics (BLS) National Compensation Surveys.^6 The overall rate of
worker participation in employer-sponsored retirement pension plans has
not changed significantly in the last few decades.

Health and retirement benefits help employers attract and retain skilled
workers; however, the costs of these benefits have accounted for an
increasingly larger share of workers' total compensation. During most of
the period from 1991 until 2002, wages and benefits increased by about the
same percentage, after which time real wages began to stagnate and real
benefit costs continued to grow through 2005.^7 Figure 1 shows the real
growth in hourly expenses attributable to wages and benefits between 1991
and 2005.

^3 The Kaiser Family Foundation (Kaiser) and Health Research and
Educational Trust (HRET) Employer Health Benefits 2006 Annual Survey.

^4 Kaiser/Hewitt Surveys on Retiree Health Benefits, 2003-2005.

^5 Employer-sponsored coverage for early retirees often mirrors coverage
for current workers. Retiree coverage for Medicare-eligible retirees
supplements benefits covered under Medicare and provides additional
cost-sharing protections, such as limiting retiree out-of-pocket expenses,
which traditional Medicare fee-for-service does not provide.

^6 According to the National Compensation Survey, the rates of
private-sector workers participating in employer retirement plans were 49
percent in 2003 and 51 percent in 2006.

^7 GAO, Employee Compensation: Employer Spending on Benefits Has Grown
Faster Than Wages, Due Largely to Rising Costs for Health and Retirement
Benefits, [39]GAO-06-285 (Washington, D.C.: February 2006).

Figure 1: Real Growth in Hourly Expenses Attributable to Wages, Health and
Retirement Benefits, and Other Benefits between 1991 and 2005

Note: Data includes private employers and the analysis used constant 2004
dollars from the BLS Consumer Price Index Research Series to control for
the effect of inflation.

aThese benefits include Social Security, Medicare, federal and state
unemployment and workers compensation, and voluntary benefits such as paid
leave, supplemental pay, and life insurance.

Health and retirement benefits are given various forms of favorable
federal tax treatment to encourage employer sponsorship and worker
participation. For example, the cost of employer-sponsored health
insurance premiums may be excluded from employers' taxable earnings and
are not included in workers' income for income taxes and from the
calculation of Social Security and Medicare payroll taxes. Similarly, the
federal government provides preferential tax treatment to employers and
workers under the Internal Revenue Code for retirement contributions that
meet certain requirements.

Workers may generally choose whether or not to participate in
employer-sponsored health programs and in some retirement programs. For
example, some individuals may have access to health insurance through a
family member's employer or through a publicly funded program, such as
Medicaid or Medicare,^8 while others may choose to purchase health
insurance on their own or decide to forego coverage. Almost all workers
are covered by Social Security and workers may include other financial
resources as part of their retirement planning, such as participation in
an employer-sponsored retirement plan, when offered, and other savings and
financial resources.^9 Some employer-sponsored retirement plans make
contributions toward workers' plans without requiring any additional
contributions from workers.^10 If workers are required to contribute in
order to participate in an employer retirement plan, some workers may
choose not to participate.

Evolution of Employer-Sponsored Health Benefits

The costs of health care and health-related benefits have been increasing
for decades. Several factors help explain the rise in costs, including
increasing demand for services, advances in expensive medical technology,
and an aging population. The Kaiser Family Foundation and Health Research
and Educational Trust (Kaiser/HRET) Annual Employer Health Benefits
Surveys found that from 2001 to 2006 annual premium costs for single and
family coverage rose by about 60 and 63 percent, respectively, and in each
of those years premiums grew more than twice the rate of wages.^11

To contain rising health care costs, employers have made several changes
to health benefits. For several decades, traditional fee-for-service plans
were the predominant form of private health benefits sponsored by
employers. These plans essentially reimbursed any providers for services
covered by a plan based on providers' actual costs with little or no
incentives to control utilization. In the late 1980s employers
increasingly looked to managed care plans, such as health maintenance
organizations (HMO) and preferred provider organizations (PPO), as a way
to contain these rising costs. HMOs and PPOs generally rely on providers
to control service utilization and they provide financial incentives to
encourage patients to use network providers who have agreed to accept fee
discounts. Under an HMO, patients may be restricted to using only network
providers, and they typically require that all specialty care be
coordinated through a primary care physician. While enrollment in HMOs
increased, some enrollees became resistant to the restrictions imposed by
the plans and employers increasingly offered PPOs that offered more
provider choice and flexibility. PPO enrollees face lower cost-sharing
requirements when they receive care from network providers, but may choose
non-network providers at a higher cost and do not typically need referrals
to see a specialist.^12 Despite these cost-control mechanisms, health care
costs continued to rise.

^8 Medicaid is a joint federal and state program that finances health care
for certain low-income individuals and Medicare is the federal health care
program for the elderly and disabled.

^9 Some ways of savings also provide tax incentives. For example,
Individual Retirement Accounts (IRA) authorized by ERISA allow workers to
make tax-deductible and nondeductible contributions to individual accounts
for retirement savings.

^10 Some employer-sponsored retirement plans may also allow additional
voluntary worker contributions.

^11 Survey data show that 2006 had the slowest rate of premium growth at
7.7 percent. Premiums for family coverage have risen more quickly than for
individual coverage, with the average annual costs for single and family
coverage in 2006 across all employers of $4,242 and $11,480, respectively.

While managed care relies primarily on health care providers to control
rising costs, more recently employers have also looked to workers to
assume greater responsibility for controlling these costs, such as by
offering consumer-directed health plans (CDHP). CDHPs combine a
high-deductible health plan with a tax-advantaged account that enrollees
can use to pay for a portion of their health care expenses.^13 Unused
balances may accrue for future use, potentially giving employees an
incentive to purchase health care more prudently. The higher deductibles
generally result in lower health insurance premiums because the enrollee
bears a greater share of the initial cost of care. Although not required
to do so, CDHP insurance carriers typically provide enrollees with
decision-support tools, such as Web-based information on costs of services
and quality of providers, to help them become more actively involved in
making health care purchasing decisions.^14

12 Cost-sharing refers to the enrollee's share of payments for covered
services, such as co-payments--a fixed charge--and coinsurance--a
percentage of the payment.

^13 The most common tax-advantaged savings arrangements that enrollees can
use to pay for a portion of their health expenses are health reimbursement
arrangements (HRA) or health savings accounts (HSA). These accounts allow
funds to accrue over time. HRA accounts are owned by the employer, and
only the employer may contribute to them. HSAs are owned by the enrollee
and, therefore, are portable when workers change jobs. Both employers and
enrollees can make contributions to the HSA.

While not a new concept, employers often offer voluntary health and
wellness programs in combination with CDHPs. These programs are intended
to encourage enrollees to engage in healthy behaviors to help prevent
certain chronic diseases and improve overall health. These benefits often
include disease management programs in which individuals with certain
high-risk conditions have access to a case manager to help them manage
their disease; access to health advice lines; behavior modification
programs such as smoking cessation; and health risk assessment programs to
assess enrollees' potential for health problems and suggest ways for
participants to reduce their risk of disease. Health risk assessment
programs can also provide employers with information about the overall
health profile of their worker population that can be used to design
targeted disease management and behavior modification programs.

While most employer-sponsored health benefit plans provide comprehensive
coverage, employers may also offer health benefits through mini-medical
plans. A mini-medical plan provides basic medical coverage combined with
lower premium costs and a lower coverage cap than a comprehensive or major
medical plan. Annual coverage limits typically include restrictions on the
number of services covered, a low maximum dollar cap on spending, or both.
For example, a mini-medical plan might cover no more than five doctor
visits or no more than $200 per year for physician services. While these
plans may include coverage for a wide range of hospital or specialty
services, annual and lifetime coverage caps for mini-medical plans are far
below those of comprehensive health insurance plans. For example, a
mini-medical plan's coverage cap might be set at $25,000 annually with a
lifetime cap of $50,000, while many comprehensive health plans have no
coverage caps or have lifetime caps in excess of $1,000,000.^15

14 Proponents of CDHPs contend that CDHPs can help restrain the growth in
health care costs. They maintain that because account funds accrue over
time, enrollees have an incentive to seek lower-cost health care services
and to limit their discretionary spending on health care by obtaining care
only when necessary. Critics of CDHPs are concerned that they will attract
healthier workers than other plans, driving up costs in other plan
options. There are concerns that these plans will lead some enrollees to
stint on needed care and that enrollees may not have adequate information
in order to seek lower-cost health care services.

Types of Employer-Provided Retirement Benefits

Employer-provided retirement plans can generally be characterized as
either DB or DC plans. Under a traditional DB plan, an employer provides
periodic payments to workers beginning at retirement, using a formula that
considers a worker's salary, age, and years of service. An employer is
responsible for funding benefits in compliance with federal laws. To
participate in employer-sponsored DB plans, workers must meet eligibility
requirements; to receive any future benefits from the plans, workers must
be vested. Vesting provisions specify when workers acquire the irrevocable
right to pension benefits. Some employers offer hybrid DB plans that
specify the current account balance as a dollar amount like a DC plan, but
assume the financial risk to provide that amount, like a DB plan. For
example, a common type of hybrid plan is a cash balance plan, which
expresses benefits as an "account balance" based on hypothetical pay
credits (percentage of salary or compensation) and hypothetical interest
credits to employee accounts rather than predetermined payment amounts at
retirement.^16 Qualifying DB plans are federally insured by the PBGC. The
agency provides retirement benefits to eligible workers in the event that
their plans are terminated without sufficient assets to pay promised
benefits. PBGC had an accumulated $19 billion deficit at the end of
federal fiscal year 2006. The recently passed Pension Protection Act of
2006 (PPA) seeks to increase PBGC funding by requiring some plans to pay
higher PBGC insurance premiums and to bolster the financial viability of
private pension plans by requiring some employers to increase the funding
of their plans.

Under DC plans, a worker's benefits at retirement depend upon the
accumulation of funds in a worker's account, which may include employer
and worker contributions, as well as the net investment returns on these
contributions. Workers are generally responsible for managing their
retirement assets. The common type of DC plan is the 401(k), which allows
workers to choose to contribute a portion of their pre-tax compensation to
the plan under section 401(k) of the Internal Revenue Code.^17 To
encourage participation in and contributions to such plans, employers may
wholly or partially match worker contributions.

^15 According to the 2005 Mercer National Survey of Employer-Sponsored
Health Plans, the median lifetime coverage caps for PPO plans was
$2,000,000.

^16 Another type of hybrid DB plan is the pension equity plan, under which
employees earn a percentage of final average pay expressed as a lump sum
amount. These plans are similar to cash balance plans in that higher
benefits accrue earlier in a career and lower benefits accrue later in a
career than under traditional DB plans. See GAO, Private Pensions:
Implications of Conversions to Cash Balance Plans, [40]GAO/HEHS-00-185
(Washington, D.C.: Sept. 29, 2000) and Private Pensions: Information on
Cash Balance Pension Plans, [41]GAO-06-42 (Washington, D.C.: Nov. 3,
2005).

Individuals covered by employer retirement plans include:

           o active workers who currently work for the employer and
           participate in the plan;
           o separated vested workers--workers who previously worked for an
           employer and qualify for future DB pension benefits or retain a DC
           account with their former employer;
           o designated individuals of qualified deceased workers or
           retirees; and
           o retirees.

For the purpose of studying changes in employer-sponsored retirement plan
participation, active workers are considered a better measure because they
are part of the plans that employers are currently offering to workers. In
contrast, a retired worker may receive benefits from an employer plan,
even when the employer does not offer such a plan to current workers.

Workforce Restructuring

Millions of Americans are no longer in traditional work arrangements as
full-time, year-round workers. Many workers are often characterized as
contingent workers, which include a variety of categories such as agency
temporary workers, contract company workers, day laborers, direct hire
temps, independent contractors, on-call workers, self-employed, and
part-time workers.^18 Employers' use of contingent workers, workers that
are not full-time, year-round employees, has remained constant over the
last decade at about 30 percent of the total workforce. Employers hire
contingent workers to accommodate workload fluctuations, fill temporary
absences, and screen workers for permanent positions, among other reasons.
Workers take contingent jobs for a variety of reasons, both personal and
financial. These reasons include workers' preference for a flexible
schedule due to school, family, or other obligations; need for additional
income; inability to find a more permanent job; and hope that the position
will lead to permanent employment. Figure 2 shows the composition of the
contingent workforce as of February 2005.

^17 26 U.S.C. S 401(k) sets out requirements for plans to qualify for
tax-deferred treatment. Other types of DC plans include profit sharing
plans, money purchase plans, target benefit plans, and employee
stock-ownership plans.

^18 "Contingent work" can be defined in many ways to refer to a variety of
nonstandard work arrangements. See GAO, Contingent Workers: Incomes and
Benefits Lag behind Those of Rest of Workforce, [42]GAO/HEHS-00-76
(Washington, D.C.: June 30, 2000) and Employment Arrangements: Improved
Outreach Could Help Ensure Proper Worker Classification, [43]GAO-06-656
(Washington, D.C.: July 11, 2006).

Figure 2: Composition of the Contingent Workforce (February 2005)

Notes: The CPS is based on a sample of the civilian non-institutionalized
population, which includes both private- and public-sector workers. Actual
estimated percentages do not add to 100 percent because of rounding.

Also, some workers are employed through alternative arrangements, such as
with Professional Employer Organizations (PEO). PEOs usually operate as
co-employers with traditional employers.^19 According to the National
Association of Professional Employer Organizations there are currently 2
to 3 million workers in such arrangements.

^19 PEOs provide management of human resources, employee benefits,
payroll, and workers compensation and unemployment insurance claims.

Key Legal Protections for Workers and Retirees

There are many federal laws that employers must adhere to if they provide
health or retirement benefits to workers and retirees and if they consider
options for reducing costs associated with providing employee benefits.
For example, the Employee Retirement and Income Security Act, the Age
Discrimination in Employment Act, the Health Insurance Portability and
Accountability Act, and the Americans with Disabilities Act each contain
important protections for some workers and worker benefits.^20

The Employee Retirement Income Security Act of 1974 (ERISA) governs
employee pension and welfare plans, which includes health care
benefits.^21 Although ERISA does not require any employer to establish
benefit plans, it does set certain minimum standards that most employers
must satisfy to obtain tax advantages if they voluntarily elect to offer
pension or health care benefits to their employees. ERISA requires that
plan fiduciaries run the plan solely in the interest of participants and
beneficiaries and for the exclusive purpose of providing benefits.
Fiduciaries must act prudently and diligently and generally must diversify
the plan's investments in order to minimize the risk of large losses.
ERISA requires employers to provide their employees with a summary plan
document that contains important information about the benefit plan. They
must also submit an annual report to the Secretary of Labor and plan
participants that includes, among other things, a detailed financial
statement, the number of employees enrolled in the plan, and the names and
addresses of plan fiduciaries.^22 Under ERISA, pension plans are generally
subject to more extensive regulation than health benefit plans. For
example, while ERISA has detailed participation and vesting requirements
for pension plans, these rules do not apply to health plans. Furthermore,
employers' pension plans must meet non-discrimination testing requirements
that seek to ensure that the plan design does not exceed certain limits in
favoring highly compensated employees in participation and benefits over
non-highly compensated employees. Although ERISA provides protections for
much of the workforce, other laws permit employers to exclude some
contingent workers, such as temporary, on-call, and part-time workers,
from certain benefits plans.^23

20 In addition, the National Labor Relations Act of 1935 is the primary
law governing relations between unions and employers in the private
sector. The statute guarantees the right of certain employees to organize
and to bargain collectively with their employers over wages, hours, and
other terms and conditions of employment, which courts have generally
interpreted to include retirement and health care benefits for current
workers. 29 U.S.C. S 151 et seq.

^21 29 U.S.C. S 1001 et seq.

^22 Each company sponsoring a tax-qualified DB and DC pension plan must
file Form 5500, "Annual Return/Report of Employee Benefit Plan," in a
consolidated report for the Internal Revenue Service, the Department of
Labor, and the PBGC. The latest DOL analysis of Forms 5500 is for the 2003
year filings.

The Age Discrimination in Employment Act of 1967 (ADEA) was enacted to
promote the employment of older persons based on their ability rather than
age, to prohibit arbitrary age discrimination in employment, and to help
employers and workers find ways of meeting problems arising from the
impact of age on employment.^24 The ADEA, with some exceptions, prohibits
employers, employment agencies, and labor organizations from
discriminating against individuals over 40 on the basis of age.
Specifically, employers may not refuse to hire an applicant or discharge
an employee because of the individual's age, and they may not otherwise
discriminate against individuals with respect to compensation, terms,
conditions, or privileges of employment because of their age. Furthermore,
employers may not classify employees in a way that would deprive them of
employment opportunities or otherwise affect their status as employees on
the basis of age. However, the ADEA does identify some practices that
employers may engage in without violating the general prohibition against
discrimination. For example, under certain circumstances, an employer may
reduce benefit levels for older workers to the extent necessary to achieve
approximate equivalency in cost for older and younger workers. A benefit
plan is considered to be in compliance with the ADEA if the actual amount
of payment made, or cost incurred, on behalf of an older worker is equal
to that made or incurred on behalf of a younger worker, even though the
older worker may thereby receive a lesser amount of benefits or insurance
coverage.^25

23 For example, ERISA allows employers to exclude workers who have worked
less than 1,000 hours in a 12-month period from entering their pension
plans. In addition, some temporary, on-call, or other contingent workers
may not be considered employees and therefore would not be entitled to
benefits under a plan.

^24 29 U.S.C. S 621 et seq.

^25 29 C.F.R. S 1625.10(a)(1).

Among other things, the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) prohibits employers and health insurance companies
from discriminating against employees on the basis of their health
status.^26 Under HIPAA, an employer may not establish any employee
eligibility or continued eligibility rules that are based on certain
health-status-related factors, as applied either to the employee or his or
her dependents. Health-status-related factors are defined broadly to
include both physical and mental medical conditions, an individual's past
claims experience, receipt of health care, medical history, genetic
information, disability, and evidence of insurability. This prohibition on
discrimination does not require that an employer offer particular
benefits, nor does it prevent an employer from using limits or
restrictions on the amount, level, extent, or nature of the benefits for
similarly situated employees.

Title I of the Americans with Disabilities Act of 1990 (ADA) prohibits
discrimination in employment on the basis of disability.^27 Specifically,
employers with 15 more or employees are prohibited from discriminating
against individuals with disabilities in regard to job application
procedures, hiring, advancement, or discharge, compensation, job training,
and other terms, conditions, and privileges of employment. To be protected
by the ADA, a person must have a disability, as defined in the law, and be
capable, with or without reasonable accommodation, of performing the
essential functions of the position that he or she holds or desires.
Reasonable accommodation may include, among other things, making existing
facilities used by employees readily accessible to and usable by
individuals with disabilities, as well as job restructuring, modified
schedules, or the acquisition or modification of equipment or devices.

^26 26 U.S.C. S 9802; 29 U.S.C. S 1182; 42 U.S.C. S 300gg-1.

^27 42 U.S.C. S 12101 et seq.

Recent Changes in Employer-Sponsored Health Benefits Prompted by Cost Concerns
May Particularly Affect Lower-Wage and Less Healthy Workers

Many employers have changed employee health benefits in several ways to
respond to rising costs while trying to continue to meet the demands of
their workforce. As health care costs rise, the share of employers
offering health benefits has fallen and employers have shifted
responsibility for paying more health care costs to current workers and
retirees. Employers have also begun offering new types of health plans to
their workers, including CDHPs and mini-medical plans. Some of these
changes may particularly affect low-wage or less healthy workers.

Fewer Small Employers Offered Health Benefits

In recent years, the share of employers offering health benefits has
declined, due largely to a decrease in the share of small employers
offering coverage, and the share of individuals covered by these benefits
has also declined.^28 While the share of large employers offering health
benefits remained fairly constant between 2001 and 2006 at about 98
percent, the share of small employers (with 3-199 employees) offering them
dropped from 68 percent to 60 percent (see table 1). Health policy experts
from one organization we interviewed told us this decline is likely due to
new employers choosing not to offer coverage rather than existing
employers dropping coverage.^29 Employer survey data show that in 2006, 74
percent of employers not offering health benefits cited high premiums as
very important in their decision not to offer them.^30 The percent of all
workers covered by employer-sponsored health plans has also decreased in
recent years, falling from about 73 percent in 2001 to about 70 percent in
2005.^31

28 Because workers may choose whether or not to participate in
employer-sponsored health benefits, we separately report on the share of
employers who offer coverage and the share of workers who are covered by
these benefits.

^29 These experts told us that it is difficult to drop health benefits
once offered because the offer of health benefits is an important factor
for worker retention and morale.

^30 The Kaiser/HRET Employer Health Benefits 2006 Annual Survey.

^31 Current Population Survey Data, 2001 to 2005. Data for 2006 were not
available.

Table 1: Percentage of Firms Offering Health Benefits by Firm Size, 2001
and 2006

                                         2001 2002 2003 2004 2005 2006 
All employers                           68   66   66   63   60   61 
Large employers (200 or more workers)   99   98   98   99   98   98 
Small employers (3 to 199 workers)      68   66   65   63   59   60 
50-199 workers                          96   95   95   92   93   92 
25-49 workers                           90   86   84   87   87   87 
10-24 workers                           77   70   76   74   72   73 
3-9 workers                             58   58   55   52   47   48 

Source: The Kaiser Family Foundation and Health Research and Educational
Trust Employer Health Benefits, 2001 to 2006 Annual Surveys.

Note: Data include private- and public-sector employers, and exclude
employers with fewer than three employees.

Many Employers Changed the Design of Health Benefit Packages

Industry experts and survey data indicate that employers are changing
health benefits packages in several ways.

  Shifted More Responsibility for the Costs of Health Benefits to Workers

While the share of premiums borne by workers showed little variation for
several years, employers recently shifted more responsibility for the
costs of health benefits to workers by increasing deductibles,
co-payments, and coinsurance. Many employers recently introduced
deductibles for services where none previously existed. According to one
survey, there were steady increases in the share of employers that
required deductibles for PPO in-network care and HMO inpatient hospital
services between 2001 and 2005--with total increases of 20 and 24
percentage points, respectively.^32 Employers also recently increased
annual deductible amounts. According to another survey, annual deductibles
increased by 58 percent between 2001 and 2005 for workers enrolled in
single PPO coverage from $204 to $323.^33 Costs were also shifted to
workers through increased co-payments and coinsurance at the point of
care. Recent data shows that among workers enrolled in PPOs that required
either co-payments or coinsurance, the co-payment amounts and coinsurance
rates increased for many workers (see table 2).

^32 Mercer National Survey of Employer-Sponsored Health Plans, 2001 to
2005. Data for 2006 were not available.

^33 The Kaiser/HRET Employer Health Benefits Annual Survey, 2001 and 2005.
Comparable data for 2006 were not available.

Table 2: Change in the Share of PPO-Enrolled Workers with Selected
Cost-sharing Arrangements, 2004 and 2006

                           Share of covered                              
                               workers           Percentage point change 
                               2004    2006                    2004-2006 
Co-payment worker pays                                                     
$5 to $15                     53      38                               -15 
$20 to $30                    43      59                                16 
Coinsurance worker pays                                                    
10 to 15%                     40      28                               -12 
20 to 25%                     56      68                                12 

Source: GAO analysis of the Kaiser Family Foundation and Health Research
and Educational Trust Employer Health Benefits, 2004 and 2006 Annual
Surveys.

Notes: Data include workers employed by private- and public-sector
employers. Co-payments and coinsurance apply to an in-network physician
office visit. Comparable data were not available prior to 2004.

Although employers continue to report cost-sharing increases, some
benefits representatives have indicated that this trend may change due to
employers' concerns about workers' willingness to absorb more costs.
Employer survey data show that the share of employers that reported future
plans to increase cost-sharing was 23 percent in 2003, but fell to 10
percent by 2005.^34

  Introduced New Health Plan Options

Some employers are beginning to offer new health plan options to their
workers, including CDHPs and mini-medical plans, either to control costs
or to meet the needs of certain workers. For example, one employer survey
found in 2006 that 7 percent of all firms offering health benefits offered
CDHPs, up from 4 percent in 2005.^35 This growth was largely due to an
increase in the percent of employers offering HSA-qualified plans, which
increased from 2 percent in 2005 to 6 percent in 2006. According to this
same survey, among employers who offered HSA-qualified CHDPs in 2006, 37
percent did not make a contribution to workers' HSA accounts. While
employer interest in offering CDHPs is increasing, some survey results
suggest that enrollment is either holding steady or growing slightly, and
overall enrollment remains low.^36, 37

34 Mercer National Survey of Employer-Sponsored Health Plans, 2003 and
2005.

^35 The Kaiser/HRET Employer Health Benefits 2005 and 2006 Annual Surveys.
Surveys prior to 2005 did not collect information related to CDHPs.

Surveys have found and benefits consultants told us that employers are
offering CDHPs as a way to shift more of the cost and responsibility of
health care to workers, while also encouraging them to become more
actively engaged in their own health care decisions. According to
consultants, employers hope that CDHP enrollees will decrease their use of
unnecessary medical services, leading to immediate cost-savings, and also
be encouraged to lead healthier lifestyles, potentially leading to
long-term cost savings. Early evidence suggests that premiums are growing
more slowly among CDHPs than among PPOs and HMOs.^38

Employer interest in mini-medical plans may also be growing, although data
to measure this trend is limited.^39 For example, industry representatives
told us that mini-medical plans are gaining acceptance among companies
including some large employers in the retail and service sectors. In
addition, in 2006 36 percent of employers with over 10,000 workers
reported being interested or very interested in adopting these plans, with
the highest reported interest among the retail, service, and
transportation industries.^40 Experts and industry officials we
interviewed indicated that employers are offering mini-medical plans to
meet the needs of low-wage workers who were previously ineligible for or
could not afford more comprehensive health benefit options when offered.
However, one insurance industry representative told us that a small number
of employers have offered mini-medical plans as a replacement for
previously offered comprehensive coverage.

^36 The Kaiser Family Foundation has indicated that, among workers whose
employers offer health benefits, enrollment in CHDPs held steady at 4
percent between 2005 and 2006. Mercer's survey found that of workers who
were eligible for their employers' health plans, enrollment in CDHPs
increased from 1 to 3 percent between 2005 and 2006.

^37 Benefits consultants told us that enrollment in CHDPs is low when
offered along side other more traditional health benefit options. However,
most employers continue to offer multiple options, citing concern about
workers' reaction to the full-replacement of more traditional options. In
2006 we reported that, according to benefits consultants and insurance
carrier representatives, there is growing interest among employers in
fully replacing their traditional plans with CDHPs, and that one large
employer we spoke with had done so. See GAO, Consumer-Directed Health
Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Care
Coverage, [44]GAO-06-514 (Washington, D.C.: Apr. 28, 2006).

^38 According to the Kaiser/HRET Employer Health Benefits 2006 Survey,
high-deductible health plans with a savings option saw annual premium
growth of about 5 percent, versus about 9-percent growth among HMOs and
about 8-percent growth among PPOs.

^39 The National Association of Insurance Commissioners and America's
Health Insurance Plans told us that the filing requirements mini-medical
plans must follow vary by state, making it difficult to track their
prevalence.

^40 Mercer National Survey of Employer-Sponsored Health Plans, 2006.

  Offered Health and Wellness Programs

Employers are increasingly offering health and wellness programs as well
as financial incentives for workers to participate in them because they
view them as a long-term strategy to control health costs. Table 3
summarizes the increasing prevalence of some of the most common health and
wellness programs offered by large employers from 2001 through 2005. Some
employers have also begun offering financial incentives for participation
in these programs, often as cash bonuses or token rewards, and sometimes
as discounts on premiums, co-payments, or deductibles. The share of large
employers offering financial incentives increased from 7 percent in 2004
to 13 percent in 2005.^41 Benefits consultants told us that offering these
programs and incentives for participating in them has grown in recent
years as employers believe they are a cost-effective way to help their
workers avoid costly and preventable diseases.^42

41 According to the 2004 and 2005 Mercer National Surveys of
Employer-Sponsored Health Plans. In 2005 some of the most commonly offered
incentives were for completion of a health risk assessment, participation
in a behavior modification program, and participation in a disease
management program, with 17 percent, 12 percent, and 7 percent of large
employers offering these, respectively. Data for 2006 or for years prior
to 2004 were not available.

^42 Large employers are more likely to offer such programs. However,
benefits consultants told us that they are becoming more popular among
small employers as insurance carriers are beginning to bundle these
programs within their plans. According to the 2005 Mercer survey, 62
percent of large employers rated care management as a top cost management
strategy for the next 5 years.

Table 3: Share of Employers with over 500 Workers That Offer Health and
Wellness Programs, 2001-2005

Wellness program                 2001 2002 2003 2004 2005 
Disease management^a,b             34   42   53   58   67 
Behavior modification programs^c    -    -    -   21   30 
Health risk assessment^d           20   24   27   35   46 
Health advice line^e               36   40   48   59   64 

Source: Mercer National Survey of Employer Sponsored Health Plans,
2001-2005.

Note: Data include private- and public-sector employers. Data for 2006
were not available.

aA disease management program is a voluntary program offered by health
plans for those with certain high-risk conditions, such as diabetes,
asthma, and congestive heart failure. Patients generally have access to a
case manager who coordinates physician care and educational materials to
help them learn how to effectively manage their disease and improve their
quality of life.

bThe numbers for 2001-2003 represent employers who offered diabetes
disease management programs, which is the most commonly offered type of
disease management program.

cBehavior modification programs can include smoking cessation programs,
onsite fitness facilities, or enrollment in health clubs and weight loss
programs. Comparable data were not available for 2001-2003.

dA health risk assessment generally includes a questionnaire about
health-related behaviors and risk factors that generates a report that
provides guidelines on ways to reduce the risk of disease.

eThe plan offers on-call clinicians to answer health-related questions and
provide medical advice.

Employers Continued to Offer Retiree Health Benefits, but Shifted More of the
Costs to Retirees, and Some Employers Eliminated Health Benefits for Future
Retirees

The extent to which employers offered health benefits to retired workers
and the extent to which retired workers enrolled in these benefits has
remained relatively steady for the last several years.^43 One annual
survey found that between 2001 and 2006 the share of employers with 200 or
more workers offering retiree health benefits remained relatively steady,
with about 35 percent offering retiree health benefits in 2006.^44 Between
2001 and 2005, the share of the retired U.S. population covered by
employer-sponsored health insurance also remained relatively steady, with
about 37 percent covered by such plans in 2005.^45

43 We previously reported that, according to employer surveys, a long-term
decline in the share of employers offering retiree health coverage had
leveled off in recent years. See GAO, Retiree Health Benefits: Options for
Employment-Based Prescription Drug Benefits under the Medicare
Modernization Act, [45]GAO-05-205 (Washington, D.C.: Feb. 14, 2005).

^44 The Kaiser/HRET Employer Health Benefits 2001 to 2006 Annual Surveys.
Survey data also show that retiree health benefits are most likely offered
by large or unionized firms.

^45 Current Population Survey Data, 2001 to 2005. Data for 2006 were not
available.

Employers have shifted costs to retirees through higher cost-sharing and
premium contributions. A Kaiser Family Foundation and Hewitt Associates
(Kaiser/Hewitt) survey of private-sector employers with 1,000 or more
workers that offer retiree health benefits found that in 2003, 2004, and
2005, many of these employers increased retirees' coinsurance,
co-payments, deductibles, and out-of-pocket spending limits (see table
4).^46 In addition, data from the same survey indicated that in 2005, 42
percent of surveyed employers increased premium contributions for retirees
age 65 or older at a rate that was higher than the reported increase in
total premium costs, suggesting an increase in the share of premiums these
retirees were required to pay. However, the survey researchers noted that
this subgroup of employers tended to require retirees to contribute a
lower share of premiums than other surveyed employers in that year.

Table 4: Percent of Surveyed Private-Sector Employers with 1,000 or More
Workers That Made Cost-Shifting Changes to Their Retiree Health Benefits
in the Previous Year

                                                 Year surveyed
                                                2003 2004  2005
Increased retiree coinsurance or co-payments         a 45 34 
Increased deductibles                               34 37 24 
Increased out-of-pocket limits                      29 29 19 

Source: Kaiser Family Foundation and Hewitt Associates Surveys on Retiree
Health Benefits.

Notes: Data do not include public-sector employers. Comparable data for
2006 or prior to 2003 were not available.

aIn 2003, 37 percent of large employers increased co-payments for
physician office visits and 17 percent increased retirees' coinsurance.

Although few employers have terminated coverage for current retirees, many
have done so for future retirees. The Kaiser/Hewitt survey found that
among surveyed employers, 10, 8, and 12 percent dropped benefits for
future retirees in 2003, 2004, and 2005, respectively. In contrast to
employer-sponsored retirement plans, employer-sponsored health plans are
not subject to ERISA's vesting rules that require plans to establish
employee rights in certain benefits based on years of service. Therefore,
retirees are generally not protected against the termination of health
benefits unless those benefits are found to have been vested, such as
through explicit contractual language included in the plan documents by
employers. Alternatively, employers may elect to include reservation of
rights clauses in plan documents, which generally permit them to modify or
terminate health benefits at any time. Terminations are more likely to
affect new hires and workers who were hired after a specific date. Some
experts believe the practice of terminating health benefits for future
retirees will continue, and the Kaiser/Hewitt survey found that 10 percent
of surveyed employers reported in 2006 that they are either very or
somewhat likely to terminate retiree health benefits for future retirees
in the next year. Some experts believe that this trend might be an
indication that employers view these benefits as less important in
attracting and retaining high-quality workers than offering health
benefits for current workers.

^46 Kaiser Family Foundation and Hewitt Associates Survey on Retiree
Health Benefits. This survey has been conducted annually since 2002.

Certain Recent Changes in Employer-Sponsored Health Benefits May Particularly
Affect Low Income and Less Healthy Workers

Loss of health benefits and increased cost-shifting may particularly
affect low-wage and less healthy workers. Decreasing rates of coverage
among low-wage workers may be an indication that recent changes are
disproportionately affecting these workers. A recent study found that,
compared to their higher-wage counterparts, between 2001 and 2005, there
were steeper declines in the percent of low-wage workers employed by firms
that offered coverage and in the percent that enrolled in coverage when
offered (see table 5).^47 In addition, the Agency for Healthcare Research
and Quality reported that between 2001 and 2004, enrollment among eligible
workers employed by large retail firms--which often employ low-wage
workers--fell, while enrollment among all employers held steady.^48 Some
experts believe that the recent drop in enrollment at the lowest income
levels may be explained by the increasing cost of benefits to
workers--such as higher premiums and increased cost-sharing
requirements--which make them particularly difficult for low-wage workers
to afford.

^47 The Kaiser Commission on Medicaid and the Uninsured, Changes in
Employer-Sponsored Health Insurance Sponsorship, Eligibility, and
Participation: 2001-2005 (Washington, D.C. 2006).

^48 According to data from the Agency for Healthcare Research and
Quality's Medical Expenditure Panel Survey-Insurance Component, enrollment
among workers at large retail firms with 1,000 workers or more dropped
from about 76 percent in 2001 to about 67 percent in 2004, while
enrollment by eligible workers among all large employers held steady at
about 81 percent over the same period.

Table 5: Percentage Point Change in Rates of Employer Sponsorship of
Health Benefits, and Worker Eligibility, Enrollment, Coverage, and
Uninsurance, 2001-2005, by Income Level, Based on the Federal Poverty
Level (FPL)

                                                  Income Level
                                        Less                                  
                                        than 100-199%               Over 400% 
                                    100% FPL      FPL  200-399% FPL       FPL 
Worker's employer offers health             -5.7^a -4.1^a -1.2^b    -1.1^a 
benefits                                                                   
Worker is eligible (when health                0.0 -1.9^b   -1^a      -0.1 
benefits are offered)                                                      
Worker enrolls (when health                 -7.2^a -3.0^a -1.4^a      -0.3 
benefits are offered)                                                      
Worker has any                              -6.4^a -7.0^a -3.9^a    -0.8^b 
employer-sponsored coverage                                                
Worker is uninsured                          7.4^a  5.2^a  2.6^a       0.4 

Source: Urban Institute analysis of CPS data completed for the Kaiser
Commission on Medicaid and the Uninsured, Changes in Employer-Sponsored
Health Insurance Sponsorship, Eligibility, and Participation: 2001 to
2005.

Notes: The CPS is based on a sample of the civilian non-institutionalized
population, which includes both private- and public-sector workers. The
data represented in this table exclude self-employed workers, workers
under the age of 19 or over 64, and workers who are full-time students
under 23.

aIndicates that the change between 2001 and 2005 in percent of people is
statistically significant at the 95 percent confidence level.

bIndicates that the change between 2001 and 2005 in percent of people is
statistically significant at the 90 percent confidence level.

Similarly, experts are concerned that further cost-shifting of retiree
health benefits may eventually lead some retirees--particularly those with
lower retirement incomes--to drop this coverage, though the implications
of this for some Medicare-eligible retirees might be mitigated by the
recent introduction of Medicare Part D.^49 Less healthy workers may be
more affected by increased cost-shifting than others, because those who
are high utilizers of health care may spend a greater share of their
income on the care they receive, and if they are unable to afford it, they
may forgo needed care.

CDHPs may appeal to some workers, but may not benefit certain low-wage
workers or those with chronic illnesses who face higher out-of-pocket
expenses under these plans. We have previously reported, and others have
also found, that those enrolled in CDHPs tended to have higher incomes
than enrollees in other plans.^50 While lower premiums might make these
plans more affordable for some and might encourage employers who
previously did not offer health benefits to offer a CDHP, the increased
financial risk associated with higher deductibles and cost-sharing may
particularly affect low-income workers who may be less able to afford the
upfront costs of care. Low-income workers enrolled in HSA-based plans may
also be less likely to build their savings account balances because they
have less disposable income and their tax benefit from making
contributions would be small.^51 This may be particularly true for those
whose employers do not make contributions to their accounts. In addition,
some early research indicates that CDHP enrollees may spend more of their
annual incomes on health-related expenses than enrollees in other plan
types.^52 Those with high health care needs, such as those with a chronic
illness, might be particularly affected by these plans as they may be more
likely to use care and less able to accrue savings in their accounts from
year to year. While some studies have found that CDHP enrollees were more
likely to exhibit cost-conscious behavior than those in traditional
insurance plans, one study found that they were also more likely to delay
or skip needed medical care than were those with less cost-sharing, and
this was more pronounced among those with low incomes.^53 In addition, one
study found that CDHP enrollees believed they did not have the information
they needed to make wise decisions about the cost and quality of health
care services.^54 Workers whose employers only offer CDHPs would be
particularly affected by these potential implications.

^49 Medicare Part D provides a voluntary prescription drug benefit to
certain eligible Medicare beneficiaries. It was authorized by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L.
108-173, and became available to beneficiaries in January 2006. Some
retirees may have relied on employer-sponsored health benefits primarily
to alleviate the cost of prescription drugs; therefore Part D might fully
or partially replace lost employer-sponsored health benefits for some
retirees.

^50 See GAO, Federal Employees Health Benefits Program: First-Year
Experience with High-Deductible Health Plans and Health Savings Accounts,
[46]GAO-06-271 (Washington, D.C.: Jan. 31, 2006); and GAO,
Consumer-Directed Health Plans: Early Enrollee Experiences with Health
Savings Accounts and Eligible Health Plans, [47]GAO-06-798 (Washington,
D.C.: Aug. 9, 2006).

^51 We previously reported that 51 percent of tax filers who reported an
HSA contribution to the IRS in 2004 had an adjusted gross income of
$75,000 or more, compared to 18 percent of all tax filers under age 65 (
[48]GAO-06-798 ).

^52 Employee Benefit Research Institute, Early Experience with
High-Deductible and Consumer-Driven Health Plans: Findings from the
EBRI/Commonwealth Fund Consumerism in Health Care Survey, Issue Brief No.
288 (Washington, D.C.: December 2005).

^53 Ibid. Other studies that have looked at some of these issues include:
The Kaiser Family Foundation, National Survey of Enrollees in
Consumer-Directed Health Plans (Washington, D.C.: November 2006) and
McKinsey & Company, Consumer-Directed Health Plan Report--Early Evidence
Is Promising (Pittsburgh, Pa.: June 2005). Both the Kaiser survey and the
McKinsey study reported that CDHP enrollees appeared to be more cost
conscious than those in traditional types of health plans. The Kaiser
study also found that CDHP enrollees are more likely to skip needed
medical care.

Mini-medical plans may benefit certain low-wage workers who would have no
coverage in the absence of such a plan, but health policy experts and
industry representatives we spoke to expressed several concerns about the
adequacy of these plans. Proponents of mini-medical plans believe they
will extend benefits to workers who were not previously insured either
because they could not afford coverage or it was not offered to them. If
enrolled in mini-medical plans, these workers may be more likely to obtain
routine and preventive care, which may lead to better health outcomes and
lower overall health expenditures. Representatives we spoke to from a
health policy research organization, a benefits consulting firm, and a
labor group generally agreed that these plans could provide access to some
health coverage for individuals who were previously uninsured. However,
they also expressed concern that the limitations of these plans may be too
restrictive. For example, an annual coverage cap of $20,000 could be
exceeded by a single hospitalization. In addition, there is concern that
the limitations of these plans may not be clearly communicated to
enrollees and that those who do not understand the coverage limitations
may find themselves lacking coverage they need.^55 In addition, some labor
and consumer advocacy groups are concerned that mini-medical plans will
lead to reduced benefits for some workers, such as those whose
comprehensive benefits are fully replaced by mini-medical plans.

Some workers' rights and consumer advocacy groups have expressed concerns
about the privacy of workers' health information gathered through wellness
programs and that employers might use these programs to attract or retain
the healthiest workers. The privacy rule issued under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) places limits on health
plans' use or disclosure of individually identifiable health information.
However employers not acting as a health plan are not covered by the
privacy rule. Concerning employers' use of health information obtained
through a wellness program, HIPAA generally protects individuals from
discrimination related to health coverage and benefits based on health
status factors, such as their medical condition or history. Regulations
issued by DOL, the Department of Health and Human Services, and the
Internal Revenue Service in 2006 provide that employers may establish
wellness programs without violating the prohibition against
discrimination, provided the programs meet certain guidelines.^56 For
example, if program rewards are given to participants who meet a health
standard, such as achieving a cholesterol count below a set level, then a
reasonable alternative standard must be made available to certain
individuals, such as those who have a medical condition that makes it
unreasonably difficult for them to meet the general standard.

^54 The Kaiser Family Foundation, National Survey of Enrollees in
Consumer-Directed Health Plans (Washington, D.C.: November 2006).

^55 For example, in October 2006 a consumer advocacy group, Citizens for
Economic Opportunity, filed a lawsuit in Connecticut against Aetna, its
subsidiary Strategic Resources Company, and the state Department of
Insurance claiming that consumers were misled into thinking their
insurance coverage was more comprehensive than it was. Citizens for
Economic Opportunity v. Strategic Resources Company, et al.,
CV-06-4026380-S (Conn. Super. Ct. filed Oct. 30, 2006).

The Ongoing Shift to Different Types of Employer-Sponsored Retirement Plans
Continues to Affect Both Employers' and Workers' Roles in Retirement Planning

The trends in employer-sponsored pension benefits that have emerged over
the last several decades have continued. Participation in DB plans
continues to fall as employers continue to terminate existing plans or
freeze benefits for active workers. Some employers choosing to retain
their DB plans have converted them to hybrid plans that share
characteristics of both DB and DC plans, a trend that may increase with
the passage of the PPA. Conversely, participation in DC plans continues to
rise as employers increase their offerings of these plans. In addition,
some workers participate in both types of plans. Benefits experts stated
that employers' decisions regarding the retirement plans they offer
reflect their attempts to control retirement benefit costs and make them
more predictable. Employers' decisions affect workers' roles in retirement
planning. With DC plans, workers assume the responsibilities and risks for
managing their retirement accounts; however, a growing number of employers
are attempting to increase participation rates and retirement savings in
DC plans by automatically enrolling workers, escalating worker
contributions and offering investment funds that require less worker
management.

^56 Proposed regulations were issued in 2001, and the agencies
subsequently treated compliance with the proposed regulations as evidence
of good faith compliance with HIPAA's statutory nondiscrimination
requirements. The final regulations took effect on February 12, 2007, and
will apply for plan years beginning on or after July 1, 2007.
Nondiscrimination and Wellness Programs in Health Coverage in the Group
Market, 71 Fed. Reg. 75,014 (December 13, 2006) (to be codified at 26
C.F.R. pt. 54, 29 C.F.R. pt. 2590, and 45 C.F.R. pt. 146).

Participation in Traditional Defined Benefit Plans Decreased as Some Employers
Terminated or Froze Plans, and Others Converted to Cash Balance Plans

DOL analysis of DB plans shows the number of active participants and
number of plans has decreased over the past several decades and recent
data show that the trend is continuing. The number of active participants
in DB plans can be an important indicator of the long-term decline of the
DB system.^57 DOL analysis of Form 5500 data shows that the number of DB
plans and the number of active participants in these plans have decreased
since 1985 (see table 6).

Table 6: Employer-Sponsored Defined Benefit Plans and Active Participants,
1985, 1999, and 2003

                                                               Change between 
                               1985         1999         2003   1999 and 2003 
Employer plans^a         170,172       49,895       47,036          -2,859 
Active participants 28.9 million 22.6 million 21.3 million    -1.3 million 

Source: DOL analysis of Form 5500 filings for private-sector employers.

aDefined benefit plans subject to ERISA.

More recently, data published in the National Compensation Survey shows
that the percentage of private-sector workers with DB plans has remained
steady around 20 percent between 2003 and 2006.

A number of active workers are participants in DB plans that have been
"frozen." Pension plans can be frozen in several ways. They can be closed
to new entrants such that only those in the plan at a specific point in
time continue to accrue benefits. Plans can be frozen for some, but not
all participants, based on age, tenure, job classification, or location.
Under a hard freeze, no participant accrues any additional benefits
regardless of job tenure or compensation growth. Under a soft freeze
benefits are generally not increased for additional tenure but are
increased for compensation growth. Form 5500 data on DB plan freezes is
available for only 2003 and shows that 9.4 percent of the single-employer
DB pension plans insured by the PBGC were hard-frozen.^58 Most of these
plans were small plans with fewer than 100 participants, representing
about 2.5 percent of all participants in PBGC-insured DB plans. Benefit
consultants, benefits researchers, and others stated that employers will
continue to freeze or terminate DB plans in response to financial
distress, insufficient plan funding, and other considerations. Surveys
also report that additional employers are either considering or planning
to freeze or terminate their DB plans.

^57 The absolute number of participants (retirees, separated vested
participants, and active participants) has increased over time. DOL 5500
reports show DB coverage increasing from 39.7 million in 1985 to 42.2
million in 2003. From 1999 to 2003, the number of individuals covered by
DB plans increased from 41.4 million to 42.2 million. One reason for the
long-term increase in number of covered persons is that retirees are
living longer.

^58 The Form 5500 does not collect information that identifies whether
plans were subject to a soft freeze.

Some employers that have retained DB plans have converted them from
traditional plans to hybrid plans, such as cash balance plans. Form 5500
annual reports show that cash balance plans (as a percentage of all DB
plans) increased from 2.7 percent in 1999 to 4.9 percent in 2003. Active
participants in cash balance plans increased from 15.7 percent of all
active participants to 22.9 percent over the same period. Some consider
cash balance plans controversial because of the effect they may have on
pension benefits of workers of different ages and years of service.^59
Some court decisions have found certain cash balance plans to be age
discriminatory.^60 This has created some uncertainty about the legality of
cash balance plans and their design features that may have affected some
employers' decisions whether to convert to such plans. The PPA made
changes intended to remove legal uncertainties, which may lead to
additional conversions to cash balance plans.

^59 See GAO, Private Pensions: Implications of Conversions to Cash Balance
Plans, [49]GAO/HEHS-00-185 (Washington, D.C.: Sept. 29, 2000).

^60 See, e.g., In re Citigroup Pension Plan ERISA Litigation,
--F.Supp.2d--, 2006 WL 3770504 (S.D.N.Y. 2006)(holding that the benefit
accrual formula in Citigroup's cash balance plan violates ERISA's
prohibition against age discrimination); and In re J.P. Morgan Chase Cash
Balance Litigation, 460 F.Supp.2d 479 (S.D.N.Y. 2006)(holding that J.P.
Morgan Chase's cash balance plan violates ERISA's age discrimination
provision). But see Register v. PNC Financial Services Group, 477 F.3d 56
(3rd Cir. 2007)(affirming a lower court decision and holding that PNC's
cash balance plan does not discriminate against older employees on the
basis of age); Cooper v. IBM Personal Pension Plan and IBM Corporation,
457 F.3d 636 (7th Cir. 2006)(reversing a lower court decision and holding
that IBM's cash balance plan does not violate ERISA's age discrimination
provision); and Finley v. Dun & Bradstreet Corp., --F.Supp.2d--, 2007 WL
196753 (D.N.J. 2007)(holding the Dun & Bradstreet's cash balance plan does
not violate ERISA's age discrimination provision).

Participation in Defined Contribution Plans Continues to Increase as More
Employers Offer Plans

The number of DC plans and the number of active participants in such plans
have increased over the past several decades, continuing established
trends. DOL analysis of Form 5500 data shows that the number of DC plans
and active participants have increased since 1985 (see table 7). While the
number of participants continued to increase during a more recent 5-year
period, the number of plans decreased, largely as a result of a drop in
the number of reported plans in 2003.^61

Table 7: Employer-Sponsored Defined Contribution Plans and Active
Participants, 1985, 1999, and 2003

                                                               Change between 
                               1985         1999         2003   1999 and 2003 
Employer plans           461,963      683,100      652,976         -30,124 
Active participants 33.2 million 50.4 million 51.8 million     1.4 million 

Source: DOL analysis of Form 5500 filings for private-sector employers.

Notes: Because employers submit Form 5500 data for each retirement plan,
the aggregate number of plans includes duplicate counts of employers when
they offer more than one plan. Likewise, aggregate employee data include
duplicate counts when employees participate in more than one plan. Within
the 5-year period, the highest number of participants was in 2002 at 52.9
million, which decreased by approximately 1 million to 51.8 million in
2003.

DOL officials and industry publications stated that the decrease in DC
plans does not necessarily reflect a decrease in the number of employers
offering DC plans or the number of workers participating in DC plans.
Employers often offer several types of plans, and employers can drop plan
offerings while continuing to offer other types of plans. More recent data
from the National Compensation Survey shows an increase in the percentage
of private-sector workers with DC plans--increasing from 40 percent in
2003 to 43 percent in 2006.

^61 Form 5500 data show that the decrease in the number of plans is
primarily the result of a decline in one type of plan--money purchase
plans. The primary advantage of the money purchase plan over other types
of DC plans was that it allowed higher contribution amounts; however, the
Economic Growth and Tax Relief Reconciliation Act of 2001, raised the
maximum contribution limits on some other types of DC plans.

Some Workers Participate in Both Defined Benefit and Defined Contribution Plans

Since the mid 1980s, a steady percentage of workers have participated in
both DB and DC plans sponsored by their employers.^62 Employers that offer
a combination of a basic DB annuity and a DC plan can guarantee a certain
minimum level of retirement benefits, while workers can choose the extent
to which they participate in supplementary plans to increase their
potential benefits upon retirement. Figure 3 shows the share of the
private workforce that participated in some form of employer-sponsored
retirement plan through 1999, including those that participated in both DB
and DC plans.

Figure 3: Share of Workforce Participating in Employer-Sponsored
Retirement Plans, by Type of Plan 1985-1999

Note: "Not participating" includes those workers that choose not to
participate in such plans, those that are not eligible to participate, and
those whose employers do not offer retirement plans.

^62 These workers are also included in previous sections on DB plans and
DC plans.

The percentage of the private-sector workforce participating in both types
of plans has generally remained at about 15 percent since the mid-1980s.
Although DOL stopped conducting its analysis of dual participation with
the 1999 Form 5500 filings, others who have analyzed the data continue to
show similar levels of dual participation through 2005.

Employers' Retirement Plan Decisions Reflect Their Preference for Retirement
Benefit Cost Control and Predictability

While citing employer interest in obtaining greater control over benefit
costs, benefits experts expressed various views on the relative costs
associated with DB and DC plans. Several experts stated that companies can
save money by changing from DB to DC plans; however, they added that it is
difficult for employers to compare the relative costs of providing these
plans because of the differences in the ways each type of plan is
funded.^63 Employers' DB costs are based upon the amount of funding
necessary to provide pension payments to current and future retirees and
administrative costs, whereas DC costs are associated with employers'
current contributions and administrative costs.^64 Nonetheless, several
large companies that froze their DB plans and enhanced existing DC plans
publicly stated that the actions would save their companies money.^65

Benefits experts also stated that employers are interested in making their
benefits costs more predictable. According to the benefit consultants we
interviewed, DB plan funding is subject to cost volatility from a variety
of factors, including financial market conditions, investment performance,
regulation, accounting requirements and changes in plan provisions. For
example, DB plan funding requirements are affected by changes in interest
rates and changes in the value of plan assets.^66 In addition to interest
rate and investment risks, employers are subject to legislative and
accounting risk. For example, the PPA increases the required funding
levels for DB plans and a new Financial Accounting Standards Board (FASB)
rule requires companies to include pension obligations in their balance
sheets, rather than reporting obligations in footnotes to a financial
statement.^67 Some benefits experts indicated that the rule could have a
negative effect on companies' financial statements. A survey of employers
found that 82 percent of employers who froze or terminated their DB plans
cited cost volatility as a significant factor.^68 In contrast to DB plans,
benefits consultants stated that employers prefer the predictability of DC
plan contributions that are based on established contribution rates or are
tied to company profitability. They stated that employers seldom change
their employee contribution match rates, while profit sharing
contributions vary with the company's performance.

^63 In addition to other factors, experts stated that the age of the
workforce affects employer funding for plans.

^64 GAO has previously reported that, while plan sponsors still pay some
of the major types of fees in 401(k) plans, such as investment and
recordkeeping fees, these fees are increasingly being paid by
participants, see GAO, Private Pensions: Changes Needed to Provide 401(k)
Plan Participants and the Department of Labor Better Information on Fees,
[50]GAO-07-21 (Washington, D.C.: Nov. 16, 2006).

^65 For example, IBM reported that freezing its DB plan, while increasing
401(k) benefits, would save the company $2.5 billion to $3 billion for the
period 2006-2010. Hewlett Packard announced that it was planning to take
several cost-cutting actions, such as freezing its pension benefits, and
that savings from this and other cost-cutting measures would result in
savings of $1.9 billion annually. Verizon Communications Inc. announced
that it was freezing DB plans for active management employees and changing
management employees' retiree medical benefits to save approximately $3
billion over the next 10 years.

Despite their interest in greater benefit cost control and predictability,
experts reported that many employers were not planning to make changes to
their benefit plans. In fact, according to an employer survey, the
majority of companies with DB plans do not expect to make changes to their
plans.^69 Likewise, experts stated that employers with DC plans have not
generally made changes to the level of their DC plan contributions in
recent years; however, contributions tied to profitability have resulted
in some companies changing the amounts of annual contributions.

Employer Decisions May Affect Worker Roles in Retirement Planning

To further encourage worker participation and increased retirement
savings, a growing number of employers offering DC plans are automatically
enrolling workers and investing retirement assets on their behalf. Most DC
plans require workers to affirmatively enroll and elect contribution
levels, but a growing number of plans automatically enroll workers and
escalate the amount of the worker's contributions on a recurring basis.^70
An employer survey found that 16.9 percent of responding companies
reported that their plans offered automatic enrollment in 2005, up from
8.4 percent in 2003.^71 The survey also found that automatic enrollment is
more common in large plans than small plans--the survey indicated that in
2005, 34.3 percent of the largest plans (i.e., greater than 5,000
participants) offered automatic enrollment while only 3.5 percent of the
smallest plans (i.e., less than 50 participants) offered the feature.
Benefits experts stated that most individuals are passive in making
investment decisions and that automatic enrollment features increase
active participation. They stated that 40 to 60 percent of active workers
participate in plans when they must affirmatively join the plan, while
plans offering automatic enrollment can increase participation rates to 80
to 90 percent. Minority, low-wage, and younger workers may benefit more
with automatic enrollment because they tend to participate less than other
groups of workers. However, it is unclear whether workers will continue to
participate after being automatically enrolled, since many report that
they cannot afford to participate or do not want to tie up their money.
Some experts are concerned that employers may choose low-risk default
investments--which may provide inadequate returns--to avoid fiduciary
liability that might be related to higher-risk investments. The PPA
directed the Department of Labor to issue regulations providing employers
with guidance on developing appropriate default investments and employers'
fiduciary responsibilities.^72 Another technique employers are using in an
attempt to increase workers' retirement savings is automatically
escalating workers' 401(k) contributions. An employer survey found that,
in 2003, only 1 percent of plans offered automatic escalation while 9
percent offered this feature in 2005.^73

66 Some financial experts have suggested that employers can reduce
volatility in funding DB plans using methods such as investing in asset
types that have risks that match their pension liability risks.

^67 For public companies, FASB rule Statement of Financial Accounting
Standards 158, Employers' Accounting for DB Pension and Other
Postretirement Plans, becomes effective as of the end of the fiscal year
after December 15, 2006, and as of the end of the fiscal year after June
15, 2007, for non-public companies.

^68 Other top reasons given by employers were cost (64 percent), not
sufficiently valued or appreciated by workers (31 percent), and impact of
funding rule changes (27 percent). Hewitt Associates LLC Survey Findings:
Hot Topics in Retirement, 2006.

^69 Hewitt Associates LLC Survey Findings: Hot Topics in Retirement, 2006.

^70 Employers in some states have not chosen to use automatic enrollment
because of concerns the practice was not legal under state laws
prohibiting withholding of workers wages. The PPA preempts such state laws
when the employer meets certain conditions.

^71 Profit Sharing/401k Council of America: 49th Annual Survey of Profit
Sharing and 401(k) Plans.

^72 Under rules proposed by DOL, a worker who participates in a DC plan
will be deemed to have exercised control over assets in his or her account
if, in the absence of investment directions from the participant, the plan
invests in a qualified default investment alternative, such as a
life-cycle or targeted retirement date fund. A fiduciary of a plan that
complies with this proposed regulation, including requirements related to
providing workers adequate notice of default investments, will not be
liable for any loss, or by reason of any breach that occurs as a result of
such investments. Default Investment Alternatives Under Participant
Directed Individual Account Plans, 71 Fed. Reg. 56,806 (proposed Sept. 27,
2006)(to be codified at 29 C.F.R. pt. 2550).

Benefits experts are concerned about workers' retirement investment
performance because workers do not always choose appropriate investments.
For example, experts stated that workers can be too aggressive or too
conservative in their investment choices, resulting in lower plan balances
for retirement. Therefore, some employers are offering different types of
funds, such as life-cycle funds, to help workers manage their
investments.^74 An employer survey showed that, in 2004, 39.3 percent of
participants offered life-cycle funds elected to invest some or all of
their balances in these funds, up from 37.1 percent in 2003.^75 Some
employers also provide financial education and investment advice with the
objective of helping workers invest more wisely. An employer survey
indicated that over 47 percent of plans offered investment advice such as
one-on-one counseling, Internet-based information and tools, and telephone
hotlines.^76 However, some experts stated that retirement studies have
found that workers have little financial knowledge, despite the
employer-provided courses and seminars. Other experts stated, however,
that studies regarding the effectiveness of investment advice are
inconclusive. Some employers choose not to offer investment advice due to
concerns of fiduciary liability; however, the PPA provides additional
protections for employers subject to certain conditions.

Employers' decisions to increasingly choose DC plans over DB plans require
workers to make several key decisions about their retirement planning.
With DB plans, employers enroll all eligible workers and are responsible
for funding and managing investments to provide them with pensions upon
retirement. With DC plans, workers have generally been responsible to
elect to participate, determine the amount of their contributions, and
choose and manage their retirement. However, if workers participate in DC
plans through employers' automatic enrollment, automatic escalation, and
default investments, then the workers' role through retirement is more
similar to that under a DB plan.^77

73 Hewitt Associates LLC, Trends and Experience in 401(k) Plans, 2005.

^74 A highly diversified mutual fund that may contain a mix of stock,
bonds, and cash, designed to remain appropriate for investors in terms of
risk from their early career, through middle-age, and to retirement.

^75 Hewitt Associates LLC research report.

^76 Profit Sharing/401k Council of America: 49th Annual Survey of Profit
Sharing and 401(k) Plans.

Workforce Restructuring Can Result in Different Benefit Arrangements for Workers
and May Affect Employer Benefit Costs

Workforce restructuring through the use of contingent workers may affect
workers' benefits.^78 Contingent workers are not offered and do not
participate in employer-provided pension and health care benefits to the
same extent as full-time workers. The use of contingent workers can reduce
the costs associated with providing these benefits for employers; however,
benefits experts presented mixed views on whether employers have been
changing the composition of their workforces for this reason.

Fewer Contingent Workers Participate in Employer-Sponsored Benefit Plans, While
Participation by Part-Time Workers Has Remained Stable

As we have previously reported, contingent workers do not participate in
pension and health care benefits to the same extent as full-time workers.
We consider contingent workers to include agency temporary workers,
contract company workers, day laborers, direct hire temps, independent
contractors, on-call workers, self-employed, and part-time workers;
however, our analysis does not include self-employed or most independent
contractors, because they do not have employers. Employers are permitted
to exclude certain contingent workers from certain benefit plans, which
may occur when employers think it is impractical or too costly to include
them. Our analysis of BLS data shows that the proportion of contingent
workers offered pension and health care benefits is much less than that
for full-time workers (see fig. 4).

^77 At retirement, DB plans must offer participants an annuity, which is
the normal form of benefit payment, but can also offer participants a
lump-sum payment. DC plans are not required to provide an annuity option
to participants and usually provide benefits in the form of a lump-sum
distribution. Workers may roll-over or transfer lump-sum distributions
into certain retirement plans free of taxes.

^78 Other types of workforce restructuring, such as offshoring, plant
relocation, divestures of corporate divisions or subsidiaries, increasing
overtime work, alternative scheduling of work, etc., are not addressed in
this report, because they were not generally raised by benefit experts as
being current practices affecting employer benefit plans.

Figure 4: Percentage of Full-time and Contingent Workers Offered
Employer-Provided Pension and Health Care Benefits, 2005

Notes: Data include private- and public-sector workers. Workers in the
self-employed category and most workers in the independent contractor
category do not have employers; therefore, they are not included in this
figure.

Also, significant differences exist in pension and health care
participation rates between full-time and contingent workers. Our analysis
of BLS data shows that in 2005, contingent workers' participation in
employer-provided pension and health care plans is significantly lower
than that of full-time workers (see fig. 5). When considering whether
workers participate in benefits from any source--such as a spouse or
government-sponsored plan--percentages increase and the difference between
full-time and contingent workers narrows. For example, the percentage of
workers with health care from any source is 87 percent for full-time
workers and 73 percent for contingent workers.^79

79 See GAO, Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, [51]GAO-06-656 (Washington, D.C.: July 11,
2006).

Figure 5: Percentage of Full-time and Contingent Workers Participating in
Employer-Provided Pension and Health Care Benefits, 2005

Note: Data include private- and public-sector workers. Workers in the
self-employed category and most workers in the independent contractor
category do not have employers; therefore, they are not included in this
figure.

Our analysis of BLS data shows that pension and health care participation
rates for part-time workers--the largest component of contingent
workers^80--have remained relatively constant between 1999 and 2005 (see
table 8).^81

80 Part-time worker pension and health care participation rates are higher
than the overall rates for contingent workers.

^81 Other analyses also show little change in part-time worker
participation in benefits during similar time periods from the BLS
National Compensation Survey, Agency for HealthCare and Quality's Medical
Expenditure Panel Survey, and The Iowa Policy Project's analysis of the
BLS Contingent Work Supplement.

Table 8: Percentage of Part-time Workers Participating in
Employer-Provided Pension and Health Care Benefits, 1999 and 2005

                                           1999 2005 
Pension participation with employer       21   23 
Health care participation with employer   17   19 

Source: GAO analysis of data from the BLS Current Population Survey,
Contingent Work Supplements, February 1999 and 2005.

Note: Data include private- and public-sector workers.

Some types of contingent workers do not have a specific single employer,
such as the self-employed and most independent contractors, so they do not
receive employer-sponsored benefits.^82 Such workers may be able to factor
in costs for these benefits in their fees that they charge their clients.
Because the self-employed and most independent contractors do not have
employers, they are more likely to participate in other types of tax
deferred retirement accounts (such as IRAs and Keogh plans).^83 Our
analysis found that in 2005, 45 percent of self-employed workers and 42
percent of independent contractors reported having such accounts, compared
to 16 percent of full-time workers. Such workers may be able to deduct the
amount paid for health insurance as an adjustment to income in determining
their federal tax liability.

Employers' Use of Contingent Workers Can Affect Benefit Costs, but the Extent to
Which This Leads Employers to Use Contingent Workers Is Uncertain

We previously reported that employers' retirement and health care benefit
costs vary considerably between full-time and part-time workers. These
differences in costs may be attributable to several factors, such as the
extent to which employers offer benefits to full-time and part-time
workers, worker participation in employer-sponsored benefit plans, and
differences in the plans offered to each group (see table 9).

^82 Some workers may be misclassified as independent contractors when they
should be classified as employees, thus affecting their eligibility to
participate in employers benefit plans, see GAO, Employment Arrangements:
Improved Outreach Could Help Ensure Proper Worker Classification,
[52]GAO-06-656 (Washington, D.C.: July 11, 2006).

^83 Keogh plans are retirement plans for self-employed workers, authorized
by the Self-Employed Individuals Tax Retirement Act of 1962, Pub. L.
87-792.

Table 9: Hourly Cost of Retirement and Health Care Benefits for Full-time
and Part-time Workers, 2005

                          Full-time Part-time 
Retirement and savings     $1.07     $0.18 
Health insurance            1.92      0.49 

Source: GAO analysis of Bureau of Labor Statistics National Compensation
Survey data.

Note: Data include private-sector employers.

Some benefits experts reported that while some employers choosing to
restructure their workforces may be affecting the total amount that they
spend on benefits, the decision to restructure their workforces is made
for other strategic reasons. These strategic reasons may be to more
efficiently meet changing production and service needs in order to be
competitive both domestically and internationally. For example, an
employer may hire the number of full-time workers it knows it will need at
all times and then supplement that worker base with contingent workers
depending on production demands--instead of a continuous cycle of lay-offs
and new hiring. Other benefit experts reported that employers are
restructuring their workforces to reduce benefits costs by reducing their
numbers of full-time workers. To reduce benefit costs, some employers are
employing only a core of full-time workers in key positions to whom they
provide benefits, while other work is outsourced or done by workers who
are not included in the employers' benefit plans.

Concluding Observations

The responsibilities of employers and workers in financing health and
retirement benefits continue to evolve in an increasingly competitive
global market. Employers have played a primary role in the financing of
health benefits and retirement income for many workers for several
decades; however, many are finding it increasingly challenging to provide
these benefits. In responding to financial stresses, employers have
changed the designs of both health and retirement benefits and shifted
more of the cost, risk, and control to workers--reducing employers'
responsibilities while increasing workers' responsibilities. These types
of changes began with retirement benefits--with the shift from DB to DC
plans--and were followed by similar changes to health benefits years
later--such as through increased cost sharing and the more recent
introduction of CDHPs. While DC plans have been widely adopted and their
prevalence continues to grow, it is too early to tell if the shifting of
health care costs and risks from employers to workers is sustainable or if
CDHPs will take root in the same manner as DC plans.

Shifting some of the cost, risk, and control of health and retirement
benefits from employers to workers, as well as the responsibility for
managing them may help employers control their benefits costs and provide
greater benefit choices for some workers, but such changes can also have
other consequences. Workers participating in employer-sponsored benefits
may not have or may perceive that they do not have sufficient financial
resources, information, or knowledge to assume more of the costs and
responsibility of these benefits. For example, a recent decline in health
plan participation among lower-income workers may indicate that these
workers are no longer able to afford the higher costs of these benefits.
Similarly, although DC plans have grown in prevalence, recent employer
changes to try to increase workers' participation and workers' investment
returns--such as through automatically enrolling workers and offering
life-cycle investment funds--may be an indication of growing concerns
about workers' ability to adequately prepare financially for retirement
when they are responsible for their participation in and management of
these plans. The challenges workers face in assuming greater cost, risk,
and control of their health and retirement benefits can make it more
difficult for low-wage earners to afford health care coverage and save for
retirement. Although these challenges may weigh most heavily on the less
wealthy and less healthy segments of the workforce, they affect a broad
spectrum of the American workforce and could prove challenging to many.

Employers, individuals, and government share the responsibility of finding
long-term solutions with the goal of ensuring that individuals of varying
economic and health backgrounds are prepared for their health and
retirement needs. For employers this will involve balancing their need to
attract quality workers and maintain a workforce that is healthy and
prepared for retirement, all within their fiscal constraints. This may
mean that solutions will differ for employers depending on factors such as
their size, industry, profitability, and competition for labor. For
individuals, this will involve balancing their demand for health care
coverage and retirement savings vehicles with their ability to pay for
them. It is becoming increasingly important for individuals to become
actively engaged in planning for their health and retirement, and their
decisions on these matters will be shaped in part by their income levels
and health status. For government, this will involve balancing the need to
promote both a healthy population and a healthy economy within its own
budget constraints while facing the challenges posed by an aging
population.

Agency Comments

We provided a draft of this report to DOL. DOL did not provide written
comments, but did provide technical comments, which we incorporated as
appropriate.

As arranged with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the date of this report. At that time, we will send copies of this report
to the Secretary of Labor, relevant congressional committees, and other
interested parties. We will also make copies available to others upon
request. In addition, this report will be available at no charge on GAO's
Web site at http://www.gao.gov .

If you or your staff have any questions concerning this report, please
call Barbara D. Bovbjerg at (202) 512-7215 or John E. Dicken at (202)
512-7119. Contact points for our offices at Congressional Relations and
Public Affairs may be found on the last page of this report. GAO staff who
made major contributions to this report are listed in appendix II.

Sincerely yours,

Barbara D. Bovbjerg
Director, Education, Workforce,
and Income Security Issues

John E. Dicken
Director, Health Care Issues

Appendix I: Description of Survey Data Used in Our Analysis

To measure trends in employer-sponsored benefits, we relied primarily on
data from three private-sector surveys of employer-sponsored health
benefits and two federal surveys that address workforce characteristics
and benefits costs and participation rates.

Private Surveys of Employer-Sponsored Health Benefits

We relied on data from two annual surveys of employer-sponsored health
benefit plans conducted by private entities,^1 and one private-sector
survey on retiree health benefits. For each of these surveys, we reviewed
the survey instruments and discussed the data's reliability with the
sponsors' researchers and determined that the data were sufficiently
reliable for our purposes.

Kaiser Family Foundation and Health Research and Educational Trust
Employer Health Benefits Annual Survey (Kaiser/HRET):

           o Since 1999, Kaiser/HRET has surveyed a sample of employers each
           year through telephone interviews with human resource and benefits
           managers and published the results in its annual report--Employer
           Health Benefits.^2 Kaiser/HRET selects a random sample from a Dun
           & Bradstreet list of private and public-sector employers with
           three or more employees, stratified by industry and employer size.
           It attempts to repeat interviews with some of the same employers
           that responded in prior years. For the most recently completed
           annual survey, conducted from January to May 2006, 2,122 employers
           completed the full survey, yielding a 48-percent response rate. By
           using statistical weights, Kaiser/HRET is able to project its
           results nationwide. Kaiser/HRET uses the following definitions for
           employer size: (1) small--3 to 199 employees--and (2) large--200
           and more employees. In some cases, Kaiser/HRET reported
           information for additional categories of small and large employer
           sizes. We used the Kaiser/HRET surveys to report on the changes in
           employer-sponsored health benefits.

^1 Year-to-year fluctuations or gradual changes in these employer benefit
survey results need to be interpreted with caution. These surveys are
based on random samples designed to be representative of a broader
employer population and are used widely but may not have the precision
needed to distinguish small changes in coverage from year to year because
of their response rates and the number of firms surveyed.

^2 Kaiser/HRET has been conducting the survey of small and large employers
since 1999. From 1991 through 1998, KPMG Consulting, Inc., conducted the
survey using the same instrument.

Mercer National Survey of Employer-Sponsored Health Plans:

           o Since 1993, Mercer has surveyed a stratified random sample of
           employers each year through mail questionnaires and telephone
           interviews and published the results in its annual
           report--National Survey of Employer-Sponsored Health Plans.^3
           Mercer selects a random sample of private-sector employers from a
           Dun & Bradstreet database, stratified into eight categories, and
           randomly selects public-sector employers--state, county, and local
           governments--from the Census of Governments. The random sample of
           private-sector and government employers represents employers with
           10 or more employees. Mercer conducts the survey by telephone for
           employers with from 10 to 499 employees and mails questionnaires
           to employers with 500 or more employees. Mercer's 2005 database
           contains information from 2,122 employers who sponsor health
           plans, yielding a response rate of 21 percent. By using
           statistical weights, Mercer projects its results nationwide and
           for four geographic regions. The Mercer survey report contains
           information for large employers--500 or more employees--and for
           categories of large employers with certain numbers of employees as
           well as information for small employers (fewer than 500
           employees). We used the Mercer surveys to report on the changes in
           employer-sponsored health benefits.

Kaiser/Hewitt Survey on Retiree Health Benefits:

           o Since 2002, The Kaiser Family Foundation and Hewitt Associates
           have jointly conducted an annual survey--Survey on Retiree Health
           Benefits--that is based on a nonrandom sample of private-sector
           employers. Kaiser/Hewitt conducted its most recent survey online
           from June 2006 through October 2006 and obtained data from 333
           large (1,000 or more employees) employers. These employers
           included about one-third of the Fortune 100 companies with the
           largest retiree health obligations in 2005. Because the sample is
           nonrandom, the survey results cannot be generalized to all large
           employers. We used the Kaiser/Hewitt surveys to report on the
           changes in employer-sponsored retiree health benefits.

^3 Foster Higgins, which later merged with Mercer Human Resource
Consulting, began conducting the survey in 1986.

Private Surveys of Employer-Sponsored Pension Plans

We reviewed several major 2005 industry surveys of pension plan sponsors
including surveys by the Profit Sharing/401k Council of America (PSCA) and
Hewitt Associates LLC. Since the survey response rates are low, the data
are not generalizable. To assess reliability of the survey data, we
contacted the authors of each survey and collected information on the
methodology that was used to complete it, and determined that the data
were sufficiently reliable for our purposes.

Profit Sharing/401k Council of America Survey of Profit Sharing and 401(k)
Plans:

           o PSCA's 49th Annual Survey of Profit Sharing and 401(k) Plan
           reflects 2005 plan experiences of its members. PSCA's survey
           results are based on responses from 1,106 plan sponsors that have
           profit-sharing plans, 401(k) plans, or a combination of both and
           represent 1 to 5,000-plus employees. The survey was mailed or
           faxed to respondents and conducted from March 2006 to May 2006.
           The survey provides a snapshot as of the end of 2005. The survey
           response rate was 21 percent. PSCA is a national, nonprofit
           association of 1,200 companies and their 6 million plan
           participants. According to PSCA, it represents the interests of
           its members to federal policymakers and offers assistance with
           profit sharing and 401(k) plan design, administration, investment,
           compliance, and communication.

Hewitt Associates LLC Pension Surveys:

           o Hewitt Associates biennial survey results are reported in 2005
           Trends and Experience in 401(k) Plans. The survey results are
           based on responses from 458 employers with 1,000 employees or
           more. Nineteen percent of the respondents represented Fortune 500
           companies. The survey was conducted from mid-March through April
           2005. The survey and a link to a Web site were e-mailed to
           respondents whose e-mail addresses were available so that they
           could complete the survey on the Web or on paper. The other
           surveys were mailed with a stamped and addressed envelope. The
           survey had a 9-percent response rate. Hewitt Associates is a human
           resource outsourcing and consulting firm. Hewitt also analyzed
           401(k) savings and investment behavior, in its research report,
           How Well Are Employees Saving and Investing in 401(k) Plans, 2005.
           The analysis includes more than 2.5 million eligible workers and
           more than 1.6 million active participants across 107 large
           employers. Further, Hewitt reported survey findings in, Hot Topics
           in Retirement, 2006, from responses from 227 employers in October
           and November 2005. Human resource professionals were surveyed to
           learn their likely areas of focus and action over the next year
           regarding their defined contribution and defined benefit plans for
           active salaried workers.

Federal Surveys

Current Population Survey:

           o The CPS is designed and administered jointly by the Bureau of
           the Census (Census) and BLS. It is a source of official government
           statistics on employment and employment-based benefits in the
           United States. The survey is based on a sample of the civilian,
           noninstitutionalized population of the United States. Using a
           multistage stratified sample design, about 60,000 households are
           selected on the basis of area of residence to be representative of
           the country as a whole and of individual states. A more complete
           description of the survey, including sample design, estimation,
           and other methodology, can be found in the CPS documentation
           prepared by Census and BLS. We used the Annual Social and Economic
           Supplement of the CPS to estimate the overall percent of the U.S.
           workers and retirees covered by employer-sponsored health benefits
           and the Contingent Worker Supplement to estimate the number of
           different types of contingent workers and their access and
           participation in employer provided health and retirement benefits.

National Compensation Survey:

           o The National Compensation Survey (NCS) is conducted by the U.S.
           Bureau of Labor Statistics (BLS), U.S. Department of Labor. The
           estimates provided are for private nonagricultural industries. The
           NCS benefits survey obtains data on private-industry
           nonagricultural establishments and their workers. The survey
           provides data on access to and participation in selected benefits,
           such as employer health care and retirement benefits. We used the
           survey data to report increases in employer benefit expenses and
           to show workers' participation in employer retirement plans.

Appendix II: GAO Contacts and Staff Acknowledgments

GAO Contacts

Barbara D. Bovbjerg (202) 512-7215 or [email protected]

John E. Dicken (202) 512-7119 or [email protected]

Acknowledgments

In addition to the contacts named above, Randy DiRosa, Assistant Director,
and David Lehrer, Assistant Director; Joseph Applebaum; Gerardine Brennan;
Laura Brogan; Richard Burkard; Susannah Compton; Sharon Hermes; John
Larsen; Sheila McCoy; Daniel Meyer; Michaela M. Monaghan; Tovah Rom; Dayna
Shah; and Eric Wenner made key contributions to this report.

Related GAO Products

Private Pensions: Changes Needed to Provide 401(k) Plan Participants and
Labor Better Information on Fees. [54]GAO-07-21 . Washington, D.C.:
November 16, 2006.

Consumer-Directed Health Plans: Early Enrollee Experiences with Health
Savings Accounts and Eligible Health Plans. [55]GAO-06-798 . Washington,
D.C.: August 9, 2006.

Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker
Classification. [56]GAO-06-656 . Washington, D.C.: July 11, 2006.

Employee Compensation: Employer Spending on Benefits Has Grown Faster Than
Wages Due Largely to Rising Costs for Health Insurance and Retirement
Benefits. [57]GAO-06-285 . Washington, D.C.: February 26, 2006.

Federal Workers Health Benefits Program: First-Year Experience with
High-Deductible Health Plans and Health Savings Accounts. [58]GAO-06-271 .
Washington, D.C.: January 31, 2006.

Private Pensions: Information on Cash Balance Pension Plans. [59]GAO-06-42
. Washington, D.C.: November 3, 2005.

Retiree Health Benefits: Options for Employment-Based Prescription Drug
Benefits under the Medicare Modernization Act. [60]GAO-05-205 .
Washington, D.C.: February 14, 2005.

Private Pensions: Implications of Conversions to Cash Balance Plans.
[61]GAO/HEHS-00-185 . Washington, D.C.: Sept. 29, 2000.

Contingent Workers: Incomes and Benefits Lag behind Those of the Rest of
the Workforce. [62]GAO/HEHS-00-76 . Washington, D.C.: June 30, 2000.

(130558)

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www.gao.gov/cgi-bin/getrpt?GAO-07-355 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Barbara D. Bovbjerg at [email protected], or
John E. Dicken at [email protected].

Highlights of [70]GAO-07-355 , a report to the Chairman, Committee on
Education and Labor, House of Representatives

March 2007

EMPLOYER-SPONSORED HEALTH AND RETIREMENT BENEFITS

Efforts to Control Employer Costs and the Implications for Workers

Many U.S. workers receive health and pension benefits from employers, and
the cost of these benefits represents a growing share of workers' total
compensation. Employers have made changes to control these rising costs,
contending that these changes will allow them to remain competitive,
particularly in an increasingly global market. Some advocacy groups are
concerned that workers may receive reduced benefits or incur additional
costs as a result of employers' cost-control strategies. Moreover, they
contend that these changes may disadvantage certain groups of workers,
such as sicker, older, or low-wage workers.

GAO was asked to examine the practices employers are using to control the
costs of benefits. To evaluate changing employer benefit practices and
their potential implications, GAO examined: (1) current and emerging
practices employers are using to control the costs of health care
benefits; (2) current and emerging practices employers are using to
control the costs of retirement benefits; and (3) employers' workforce
restructuring changes. GAO reviewed studies of employer benefit trends;
interviewed representatives of business, government, labor, and consumer
advocacy and research organizations; and reviewed and analyzed data from
surveys of employee benefits. The Department of Labor provided technical
comments, which were incorporated as appropriate.

Many employers have recently changed health benefits, often to control
costs. The share of employers offering health benefits has declined from
2001 to 2006, due mostly to an 8-percentage point drop in the share of
small employers offering benefits. Many employers that offer health
benefits have required workers to pay a higher share of out-of-pocket
costs and some have recently introduced consumer-directed health plans,
which trade lower premiums for significantly higher deductibles. Also,
some employers now offer mini-medical plans that provide more limited
coverage at lower premiums. Similar to coverage for active workers, an
increasing share of retiree health benefits costs is being shifted to
retirees and many employers have terminated benefits for future
retirees--a trend that experts believe will continue. Some of these recent
changes may affect some workers more than others, such as low-wage workers
who are less able to afford higher out-of-pocket costs and less healthy
workers who use more health care.

The trends in retirement benefits that have emerged over the last several
decades are continuing. Active participation in defined benefit plans fell
from 29 million in 1985 to 21 million in 2003 as employers terminated
existing plans or froze benefits for active employees. At the same time,
active participation in defined contribution plans rose from 33 million in
1985 to 52 million in 2003 as employers increased their offerings of these
plans. Benefits experts stated that employers' decisions on what type of
retirement plans to offer reflects their preference for benefit cost
control and predictability in funding and accounting. Employers' decisions
to offer defined contribution plans requires workers to assume more
responsibility for their retirement planning; however, a growing number of
employers are attempting to increase retirement savings by automatically
enrolling workers and offering investment advice, for which recent
legislation provides additional flexibilities.

Workforce restructuring through the use of contingent workers--workers who
are not employed full-time and year round with an employer--may affect
workers' access to and participation in benefit programs. Benefits experts
presented mixed views on whether employers have been changing the
composition of their workforces to reduce benefit costs.

Employers, individuals, and government share the responsibility for
providing a U.S. benefits system that addresses the health and retirement
needs of individuals of varying economic and health backgrounds, while
allowing employers to remain competitive in a global market environment.
The challenges workers face in assuming greater cost, risk, and control of
their health and retirement benefits make it more difficult for low-wage
earners to afford health care coverage and save for retirement. Although
these challenges may weigh most heavily on the less wealthy and less
healthy segments of the workforce, they affect a broad spectrum of the
American workforce and could prove challenging to many over time.

References

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  54. http://www.gao.gov/cgi-bin/getrpt?GAO-07-21
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