Employee benefits can be a great addition to regular compensation. But, beware of perks that make it too costly to change jobs.
Employee Benefits can become a Trap
According to the Bureau of Labor Statistics, between 50% and 70% of private sector jobs in the US include some form of Retirement, Medical Insurance , or Life Insurance employee benefits. For government jobs, access is even higher.
Having access to employer-sponsored benefits can be a huge win for employees.
But, be careful. Some employee benefits can become a trap that will make it incredibly expensive to change jobs.
You might think that employer-provided (or subsidized) life insurance is a great benefit. But, be very careful with this one.
Imagine this scenario: you have determined that the appropriate level of life insurance for your survivors is $250,000. Your employer gives you the option to join a group life insurance policy that does not require a medical screening, and pays part of your premium. Sounds good, right? Well, what happens if you develop a health condition while working this job?
Q: What if you get diagnosed with diabetes, hyper-tension, heart disease, high cholesterol, depression, or cancer?
A: You are now trapped in your job.
In order to leave your job and maintain your family’s protection, you will have to qualify for and purchase life insurance on your own. And, that means you will have a medical exam. If you have developed any of those conditions, then you may find yourself in a high-risk category or un-insurable.
That’s why I prefer to buy my own life insurance. Figure out what amount you need to provide for your survivors and how long you will need to keep it. Then, shop around and buy it. Term insurance is often very inexpensive, so it is not worth taking a chance and getting it through work.
Bonus: AD&D Insurance is Always Garbage
Accidental Death and Dismemberment (AD&D) Life Insurance is a garbage product. Never buy AD&D.
You will only receive the death benefit of AD&D Life Insurance if you are killed as a result of an accident. But, your survivors’ needs won’t be any more or less if you die of natural causes. So, why would you buy a policy that only pays if you die in a certain way?
Ridiculous. Garbage. Never buy. Zero stars. Gross.
Another Employee Benefit that becomes a trap is a 401(k) loan.
Most 401(k) retirement plans allow you to borrow some of the money from inside your own account. Generally, you have about five years to pay the money back, plus interest… as long as you keep your job.
But, if you leave your job for any reason, then a new clock starts ticking. You now have either 60 days or until the next tax due-date to pay back your loan in full. (The rules changed on this a few years ago so now it’s a bit more lenient and confusing.) If you miss the deadline by just one day, then you will get hit with taxes and penalties for borrowing your own money from yourself.
401(k) loans are inherently dangerous and costly. That’s why I almost never recommend anyone take them except as a last resort to avoid bankruptcy or foreclosure.
Not only are 401(k) loans dangerous and costly in terms of lost growth, potential taxes, and penalties, but they handcuff you into your current job. While you have a 401(k) loan, you cannot leave your job without either paying the loan back or getting slammed with taxes and penalties.
Less Common Employee Benefit Traps
There are a few other Employee Benefits that can become golden handcuffs and trap you in your job. But, these are becoming much less common.
For the same reason that employer-sponsored Life Insurance could become a trap, health insurance used to be a potential danger. Prior to the Affordable Care Act, insurers could charge higher rates or even decline coverage for customers with certain Pre-Existing Conditions.
But, now that practice is no longer legal. Health insurers cannot even ask you about your medical history prior to signing you up. So, if you have employer-sponsored health insurance, develop a chronic medical condition, and decide to leave… you can still acquire Health Insurance coverage through your state’s insurance exchange. And, your health insurer cannot raise your rates due to any condition you may have.
Pensions are another employer-sponsored benefit that used to be much more prevalent. But, the rise of the 401(k) has made the pension increasingly unpopular.
Pensions are called “Defined Benefit” retirement plans. This is because when you start your job, you are given all of the documentation about your pension. And, in that documentation, all of the “benefits” of your pension are “defined”. That means you can see the exact calculation that the pension administrator will use to determine how much you are eligible for when you retire.
These benefits increase with your years of service with the same employer. And, they do not travel with you to your next employer. So, you could be in a situation where if you leave your employer after a certain number of years of service, you may lose some or all of your pension.
The 401(k) has changed the retirement landscape. Now, you put your own money into your 401(k), and you may get an employer match. You can then direct how your 401(k) money is invested. And, when you leave your employer, for any reason, you take your 401(k) with you. It is your money and you get to keep it.
This has led to a fundamental shift to the way the labor force in the US behaves. But, that’s an economics and sociology lesson for another time. For now, just know that one of the benefits of Defined Contribution plans is that you are not trapped with your employer, and you can take your toys and go home any time you want.
This is not an all-encompassing list of all of the employee benefits that you may encounter. But, hopefully it has shown a few examples of how well-intentioned employers can provide benefits that can trap employees and make it incredibly expensive to change jobs.
I hope that you will be aware of the consequences of these benefits and be extra careful when signing up. That way, maybe you can avoid some golden handcuffs in your future.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.