Although many companies continue to tighten their financial belts, when it comes to voluntary benefits, employers are much more employee focused, as opposed to cost driven.  Seventy-five percent of employers say their top reason for offering voluntary benefits is to expand the benefits options available to their employees, with 42% offering voluntary benefits to fulfill an employee need, and 30% offering them at their employees’ request, according to a study released  by Prudential.

Voluntary benefits are optional programs that are made available at the workplace and 100% paid for by employees.  Eighty-five percent of employers say they offer one or more voluntary benefits including life insurance (63%), disability insurance (56%) and dental insurance (52%). Ranking lower on their priority list were critical illness insurance (35%) and long-term care insurance (33%).

“For employees, the benefits offer a convenient and affordable way to purchase life, disability, long-term care, dental and vision insurance, while offsetting the income-related risks of a disability, long-term illness or the death of the family member,”  says Jim Gemus, senior vice president of Prudential Group Insurance.

Employees increasingly view the workplace as an important source for personal insurance and savings products. Half (51%) of workers cited convenience as the most common advantage and driving factor in purchasing voluntary benefits because they pay for them through payroll deduction, representing a nine-point increase since the study was conducted in 2008.  Fifty-two percent feel that offering voluntary benefits increases the value of their company’s offerings.

The study found a correlation between voluntary benefits offerings and employee satisfaction. For employers, employee satisfaction is the top gauge of success (47%) followed by achieving a certain set participation rate (34%). Gemus notes, “Employees’ increasing interest and knowledge of their benefits options, combined with employers’ renewed focus on employee satisfaction is a win-win situation for all

Why you should care about the Labor Department’s re-proposal of guidelines

Many plan sponsors have not paid much attention to the U.S. Department of Labor’s current effort to substantially broaden the definition of a plan fiduciary, agrees Lynn Dudley, Senior Vice President, Policy, at the Washington-based American Benefits Council. They do it at their peril, she suggests. “Because there are so many lawsuits based on investment menus and investment choices, this is not something to take lightly,” she says.

In September, the Labor Department announced that it will re-propose regulation, which is expected to happen in 2012. That follows the issue of the original proposal in October 2010 to expand the meaning of the fiduciary term, defining it as “a person who provides investment advice to plans for a fee or other compensation.”

The far-reaching original proposal faced lots of opposition. It “would fundamentally change the entire body of law that governs $6 trillion of ERISA assets,” says Bradford Campbell, who is Of Counsel at law firm Schiff Hardin LLP in Washington. David Bellaire, General Counsel at the Roswell, Georgia-based Financial Services Institute, says the decision to re-propose “is a move by the Department to remove the political pressure they were feeling, to give them a little time and space” to come up with a revision.

Dudley has talked to Labor Department officials about their rationale for making a change. “Their view is that a lot has changed since the definition of ‘fiduciary’ was originally done, and the role of service providers has changed a lot,” she says. “In their view, it is not always easy to tell who is a fiduciary and who is not. If they want to hold someone accountable, it is harder to do, if they do not know whom exactly to hold accountable and for what.”

The definition under ERISA always has been complex, says Roberta Ufford, a Washington-based Principal at Groom Law Group. “It is all facts and circumstances, and a five-part test. It has never been an easy test to apply, an easy test for people in the industry to understand,” she says. The original Labor Department proposal made sweeping changes to that definition, she says. Says Dudley, “The approach they felt more comfortable with is that you are not a fiduciary only if you fit an exemption. You would have to be exempted out.”

The current regs are “making it far too easy for today’s advisers to avoid fiduciary responsibility,” says Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). “The result is all too often that plan sponsors must solely bear the responsibility for advice they received from the adviser that was flawed due to bias or conflicts of interest, and are often the sole targets of legal actions that may follow. Workers also suffer when the advisers they relied on for unbiased advice failed to live up to this standard, and the funds they were counting upon were eviscerated due to shoddy advice.”

Despite deciding to revise its proposal, it seems clear that the Labor Department still intends to broaden the definition significantly, says Donald Myers, a Washington-based Partner at law firm Morgan, Lewis & Bockius LLP. “It does look like they do not plan to go back to the original version,” he says. The DoL apparently wants everybody providing advice to plans to do so on the same terms, Campbell says.

Service providers will reevaluate their offerings when a proposal ultimately becomes final, Ufford says. The idea that some providers will stop working with plans because they do not want to become fiduciaries seems less likely to her, given that the retirement system makes up a big part of the investment industry, but they might limit their services in some ways, she says.

Employers need clarity about whether new rules would apply in a bunch of situations, Dudley says. If an employee asks a company bookkeeper if a plan option is a good investment, does that make the bookkeeper a fiduciary? Do these new rules mean that non-employees, such as legal counsel and third-party benchmarking companies, will become plan fiduciaries? If a participant contacts the call center and talks with a staffer about how to diversify, does that cross the fiduciary line? Do sponsors need to renegotiate vendor agreements?

“The DoL has suggested that one of the fixes is to propose exemptions to permit some of the conduct that would have been prohibited under the previous proposal,” Campbell says. “However, I am not terribly optimistic that what they propose will adequately address some of the questions. The ideological underpinning of the initial proposal is at odds with the exemptions they now say that they are going to provide,” he says of the belief that giving investment advice has inherent conflicts.

In the next round, look for Labor to spell out more clearly the sales exemption for those marketing their products and services to sponsors. “They have said that they will make an exemption when a buyer should know that they are not a fiduciary because they are selling something to the buyer,” Campbell says. With the original proposal, he says, “It is not clear when the sales exemption is applied and how broadly. For instance, does it apply if a plan has signed on to a platform but not yet picked investments?” The initial proposal gave many the impression that someone would not have to provide a plan individualized advice to become a fiduciary, and the DoL has indicated it plans to clarify that. “What if you create generic fund menus or asset allocations that are used by plans?” Ufford asks. “The test always has said that the advice has to be individualized to the plan.”

Likewise, routine appraisals for ERISA purposes of plan assets not publicly traded—such as real estate holdings and private equity—previously have not been treated as fiduciary acts, Ufford says. Under the original proposal, that apparently would have changed. For appraisers, it would add another layer of regulation and potential liability, she says. If appraisers continuing to work with plans must become fiduciaries, she adds, “My guess is that some of the service providers currently providing valuations would be unwilling to do so.” Those that kept doing it would need to take extra steps such as getting fiduciary insurance, in turn leading to additional potential fees for plans.

Much of the ire around the original proposal centered on its potential impact on IRA rollovers and distribution planning. EBSA’s Borzi says that IRA assets now exceed those in 401(k) plans, and IRA holders do not have the benefit of a plan sponsor to help them. They need good investment advice, she says. “As millions of Baby Boomers are nearing or entering into retirement and rolling their assets out of the plan environment, these protections are needed more now than ever,” she adds.

Judy Ward

The problem of identity theft continues to grow in severity, both in terms of frequency and associated costs. With the workplace ranking as the number one source of identity theft, and with new laws that expose companies to fines and lawsuits for such thefts, employers should consider offering identity theft protection as an employee benefit.

In 2004, 9.3 million Americans–or one in every 25 adults–were victims of identity theft, according to a report by the Better Business Bureau and Javelin Research. The Federal Trade Commission (FTC) estimated that identity theft crimes tallied $52.6 billion in fraud that year, or almost $200 for every man, woman, and child in the U.S. Identity theft has been the fastest growing crime in the US for the past three years, according to the FTC, which predicts that in five years, the majority of Americans will have been victimized by identity theft.

Identity theft wreaks significant damage on its victims. The most recent figures from the Identity Theft Resource Center (ITRC), which conducts extensive research and reporting on such crimes, are that out-of-pocket expenses related to identity theft have risen to $1,495, up from $808 in 2002, plus $16,000 in average lost wages.

The average time it takes victims to recover from identity theft has risen to 607 hours, up from 175 hours in 2002. While personal liability is low in the majority of cases, a survey for Nationwide Insurance showed that 16 percent of victims were forced to pay an average of $6,440 to cover thieves’ purchases. And perhaps the greatest impact is long-term, as victims remain vulnerable for the rest of their lives. The ITRC reports that identity thieves are likely to use stolen data months or years later.

In 2005, there were at least 104 serious “data incidents” in the U.S. that compromised the records of more than 56.2 million people. And the New York Times reported last year that a worldwide criminal identity marketplace has now matured, with credit card numbers, Social Security numbers, and other personal data commonly traded and sold in huge numbers.

Employers Have A Major Stake

The number one underlying source of identity fraud is theft of employer records. A Michigan State University study found that 51 percent of all identity thefts occur in the workplace, usually perpetrated by people hired to perform low-level tasks, such as data entry.

While many businesses are most fearful for the security of their client records, payroll records are more often what’s stolen, and with increasing frequency. About 90 percent of business record thefts involve payroll or employment records; only about 10 percent involve customer lists, according to the FTC.

On June 1, 2005, a new provision of the Fair and Accurate Credit Transactions Act (FACTA) took effect. It states that any employer whose action or inaction results in the loss of employee information can be fined by federal and state government, and sued in civil court. An employee is entitled to recover actual damages sustained if their identity is stolen due to the employer’s inaction, or statutory damages up to $1,000. Employees may also bring class-action suits against employers for actual and punitive damages. In addition, federal fines of up to $2,500 per employee, and state fines of up to $1,000 per employee also may be levied.

A recent case in Michigan highlights another source of corporate liability. In the 2005 case of Audrey Bell et al vs. AFSME AFL-CIO Local 1023, the Michigan Appeals Court affirmed a jury award of $275,000 to AFSME members who had sued the union for failing to safeguard its members’ Social Security numbers. It recognized a special relationship between the union and its employees, including a duty to protect them from identity theft by providing safeguards to ensure the security of their most essential confidential identifying information, information which easily could be used to appropriate a person’s identity.

The Bell case has national implications for employers. Arizona, California, Illinois, Texas, and other states have statutes that require an employer to restrict the use and disclosure of Social Security numbers. While not as broad as Michigan’s law, they support the view that a “special relationship” exists between an employer and an employee whose data is stolen from the employer to commit identity theft.

Even in jurisdictions with no statutes restricting employers’ use or disclosure of employee Social Security numbers, the tide of legislation on identity theft may be sufficient to support a finding of the necessary special relationship. The Wall Street Journal recently predicted that there will be a flood of lawsuits by both consumers and businesses because of identity theft issues.

Employers also suffer other significant costs when their employees experience identity theft. Conservative calculations based on current identity theft figures indicate that an employer with 1000 employees, who make an average of $40,000 salary per year, should expect to incur productivity losses of more than $600,000 per year. Identity theft also threatens enterprise security, enabling corporate espionage and fraud, and theft of hard assets and intellectual property. Large scale or frequent identity thefts also results in significant negative publicity, impacting sales, partnerships, and employee recruiting and retention.

Protection As An Employee Benefit

One solution that provides an affirmative defense against potential fines, fees, and lawsuits is to offer some sort of identity theft protection as an employee benefit. An employer can choose whether or not to pay for this benefit. The key is to make the protection available, and have a mandatory employee meeting on identity theft and the protection you are making available, similar to what most employers do for health insurance.

Employees can elect either to accept or decline to have identity theft coverage. If employees have coverage and become identity theft victims, the employer gains: The victimized employees will spend less time and money, and experience less frustration in restoring their identities. If employees decline the coverage and later claim their identities were stolen as a result of the company’s actions, the employer has signed proof that they attended the presentation and declined the coverage.

Identity theft protection as an employee benefit is becoming a trend because employers are looking for ways to lower their costs. It’s unique, it’s hot in the marketplace, and it’s relatively inexpensive.

Greg Roderick, CEO of Frontier Management, says that his employees “feel like the company’s valuing them more, and it’s very personal.”

“I think it’s a tremendous value to protect someone’s name,” said Matt Oros, CEO of Benelogic. “It is like a soft pillow at night that you can lay your head on and know that you’re going to have an advocate.”

And Donald Harris, head of the International Association for Human Resource Information Management’s (IHRIM) Special Interest Group on Privacy & Security, said “Privacy is like diversity in this regard: Done the right way, each involves respecting and empowering individuals, and reaping the business benefits that this can bring, rather than acting primarily to avoid risks and legal problems.”

Do Your Homework

Keep in mind that there are significant differences among the programs that are available. Many new programs are now appearing on the market to take advantage of the fear and confusion around identity theft. It is possible to spend hundreds of dollars on partial solutions that do not effectively prevent identity theft or protect the user from harm.

The services offered tend to fall into four categories:

1. Computer protection – anti-virus, anti-spyware, wireless security, etc.
2. Guidance on protecting against a variety of exposures of personal data – from shredding documents, to opting out of marketing databases, to tracking data in Social Security, driving, medical, and financial databases
3. Credit monitoring – at varying levels of frequency, sometimes with alert services in the event of credit inquiries or changes
4. Insurance coverage – sometimes including assistance with identity recovery activities

There are high quality programs available in each of these categories, that, taken together and used diligently, will significantly reduce the majority of identity theft risks and will provide basic protection and recovery from harm. However, it can be very costly to purchase the superior programs in each category, so it is important to look for low-priced, bundled solutions that address the full range of identity protection, and are updated to deal with new threats.

Peter Marshall