Small is beautiful. And small businesses are often beautiful clients for independent agents and brokers that specialize in providing personal service to business owners. Their business risks are often narrowly defined and easily quantified and measured.

But on the other side of the insurance spectrum, small businesses often pose challenging employee benefits problems; and, as health reform takes hold, ugly days may be ahead for employees, employers and their insurance advisors.

Small businesses have never had it easy when designing effective employee benefits programs. While they may have smaller payrolls, they have all of the human resource needs of larger companies. They need to recruit and retain employees who can compete with bigger organizations and compensate them with comparable salaries and benefits. They need to manage health care costs that can escalate rapidly, affected by just one or two large health claims in a policy year.

They usually have fewer plan design options. Firms with fewer than 100 employees are usually too small to self-insure and design their own flexible benefits program. They’re at the mercy of insured health plans, often community under­written at rates higher than larger firms and with fewer desirable plan features.

And the employee benefit programs that are available to small businesses may not be doing their jobs very successfully. According to the 8th Annual MetLife Study of Employee Benefit Trends, conducted late last year, 43% of all employees surveyed said that employee benefits are a very important reason why they remain with their employers, But the employees of smaller businesses (with 500 or fewer workers) are less satisfied. Only 31% say their benefits are important.

In general, the employees of smaller businesses were consistently less satisfied with their benefits. At the smallest firms with two to 49 employees, only 24% said they were satisfied with their benefits and at the next largest tier surveyed—50 to 99 employees—only 27% were satisfied.

The MetLife surveys consisted of two separate polls by GfK Custom Research North America in New York: 1,503 employer decision makers and 1,305 employees. About 900 of the employer interviews were taken from businesses with fewer than 500 employees, and about 500 employees were interviewed from the same group.

Employers weren’t happy with the programs either, particularly the challenge of controlling their costs. More than half of decision makers (53%) said their greatest challenge was not employee satisfaction, but rather controlling

Small is beautiful. And small businesses are often beautiful clients for independent agents and brokers that specialize in providing personal service to business owners. Their business risks are often narrowly defined and easily quantified and measured.

But on the other side of the insurance spectrum, small businesses often pose challenging employee benefits problems; and, as health reform takes hold, ugly days may be ahead for employees, employers and their insurance advisors.

Small businesses have never had it easy when designing effective employee benefits programs. While they may have smaller payrolls, they have all of the human resource needs of larger companies. They need to recruit and retain employees who can compete with bigger organizations and compensate them with comparable salaries and benefits. They need to manage health care costs that can escalate rapidly, affected by just one or two large health claims in a policy year.

They usually have fewer plan design options. Firms with fewer than 100 employees are usually too small to self-insure and design their own flexible benefits program. They’re at the mercy of insured health plans, often community under­written at rates higher than larger firms and with fewer desirable plan features.

And the employee benefit programs that are available to small businesses may not be doing their jobs very successfully. According to the 8th Annual MetLife Study of Employee Benefit Trends, conducted late last year, 43% of all employees surveyed said that employee benefits are a very important reason why they remain with their employers, But the employees of smaller businesses (with 500 or fewer workers) are less satisfied. Only 31% say their benefits are important.

In general, the employees of smaller businesses were consistently less satisfied with their benefits. At the smallest firms with two to 49 employees, only 24% said they were satisfied with their benefits and at the next largest tier surveyed—50 to 99 employees—only 27% were satisfied.

The MetLife surveys consisted of two separate polls by GfK Custom Research North America in New York: 1,503 employer decision makers and 1,305 employees. About 900 of the employer interviews were taken from businesses with fewer than 500 employees, and about 500 employees were interviewed from the same group.

Employers weren’t happy with the programs either, particularly the challenge of controlling their costs. More than half of decision makers (53%) said their greatest challenge was not employee satisfaction, but rather controlling health care costs. Fewer than half said retaining employees and improving productivity were important issues, but they noted that those goals are becoming increasingly important.

These issues are likely to become more complicated, according to Scott Beck, vice president of the broker and consultant strategies group at MetLife in New York. Health reform may remove some of the small employer’s ability to control and affect health care costs, and the recovering economy may challenge small employers to be more competitive in their human resource management.

“As the U.S. economy emerges from recession, there are big expectations for small businesses to provide the engine that will drive the American economy. Retaining top talent and increasing employee job satisfaction are two strategies that may help small business employers face this challenge successfully,” he says.

How should agents and brokers advise their clients who want to rehab their employee benefits plans? The surveys provide some suggestions, according to Beck. And the biggest surprise may be a step back from an obsession with health care cost control.

“While health care legislation has grabbed the attention of small business owners and brokers, it is important to recognize that health coverage may become less of a differentiator when it comes to hiring, retaining and motivating workers,” Beck explains.

“Non-medical benefits—like dental, disability and life insurance—and voluntary offerings will likely play an increasingly significant role in driving employee loyalty, retention and engagement.”

About 59% of employees surveyed said the ancillary benefits such as dental, disability and life insurance contributed to their feelings of loyalty, but only 34% of decision makers recognized that factor.

Wellness benefits may also be more important than some small employers realize. Only 22% of small employers offered wellness benefits, compared to 61% of large employers. However more than two-thirds of decision makers at small businesses (67%) said they believe wellness programs help reduce their costs.

The MetLife report points to increasing wellness options for small businesses. They can include partnerships with local health organizations and clubs, local health care providers and flexible time off for participants in weight loss, smoking cessation and other wellness programs.

The surveys also indicate that education and communication are very important. About 64% of decision makers believe that employee concerns about their financial security affect worker productivity, yet most employers focus their benefits communication on health care issues.

 Only about 20% of small business employees say their benefits have been communicated effectively, and many employees miss messages about other benefits. Employers that provide long-term disability insurance should probably highlight the coverage more carefully and communicate more strongly options for additional income security options such as short-term disability insurance and long term care insurance.

The value of group life insurance also often goes unrecognized—simply a throw-in with other benefits—and probably deserves more attention as a financial security benefit. The data also suggests that financial planning education and better communication about income security benefits would be welcome additions to employee benefit programs.

According to the surveys, only 24% of small businesses now offer formal retirement seminars and, according to an earlier study, only about 22% of small businesses provide a retirement plan.

This suggests that a low-cost defined contribution plan or an automatic enrollment Individual Retirement Account, which is an Obama administration proposal, would be another welcome addition to any employee benefits program.

Agents and brokers can also expect some dramatic changes in their employee benefits markets as health reform takes hold. Small employers, in particular, may have fewer employee benefit provider options as health reform rules evolve and put a financial squeeze on small health insurers, according to Weiss Ratings, an insurance industry ratings firm in Jupiter, Florida. Weiss Ratings covers 585 health insurers.

“Sweeping changes mandated by health care reform, such as the removal of certain limits and mandated coverages for pre-existing conditions, will inevitably force health insurers to spend more on medical care,” notes President Martin D. Weiss.

“Most large health insurers will be able to handle it. But we are concerned that weaker, less profitable insurers will be forced out of the market, reducing competition and ultimately leading to fewer choices and higher premiums for consumers,” says Weiss.

Small employers already have fewer options than large employers and smaller resources available to manage their employee benefit needs. The situation is likely to just get tougher. However, as the health plan market consolidates, the market for ancillary benefits and voluntary benefits is likely to grow, increasing options for adding these benefits to small business programs.

Len Strazewski has been covering employee benefits issues for more than 30 years and is employee benefits columnist at Human Resource Executive magazine. He has an M.S. in Industrial Relations from Loyola University in Chicago.