Providing adequate compensation and benefit programs to a workforce while maintaining profitability always makes employers feel like they are walking a fiscal razor’s edge. But the current turbulence around tariffs has sharpened that blade and made balancing these goals more challenging than usual.

The outsized influence tariffs had and could continue to have on markets has raised alarms about the impact this volatility will have on the cost of employee benefit programs. But rather than succumb to any growing sense of panic and indulge in knee-jerk reactions, it is important to be aware of the current environment, understand its potential impacts, and begin developing a strategy for the most prudent and efficient ways to respond.

There are stances that plan sponsors can adopt to mitigate risk—for immediate effect and longer-term impacts—as well as specific sectors where we can predict this uncertainty will manifest most noticeably.

Retirement cost volatility

In Milliman’s recent study of corporate pension funding, which measured the health of the largest corporate pensions as of year-end 2024, many were found to be in a favorable position. Our recent corporate pension funding index showed an improvement in pension funded status during the month of April, illustrating the impact of market improvement from the deferral of tariffs coupled with more favorable interest rates on pension plan positions. The potential for volatility to significantly affect pension status was clear, despite the month ending favorably.

Heightened tariff-driven volatility in the market will certainly impact retirement expenses for both defined benefit (DB) and defined contribution (DC) plans. DB plans, which are already sensitive to interest rates and asset performance, could experience unexpected shifts in funded positions, potentially leading to increased required contributions and premiums to the Pension Benefit Guaranty Corporation.

During the last perfect storm of decreasing plan liabilities, rising interest rates, and improved asset performance, we saw plans in overfunded positions begin to derisk their plan. Some shifted allocations from equities to fixed income to protect their funded status while others decided to shrink the plan footprint with cashout initiatives or annuity buy-outs. This has left many in a better position to weather volatility, but plans that still have risk exposure need to have the most vigilance.

If you have already undertaken derisking in the recent past, then you are most likely in a wait-and-see situation and already planning next steps; if you haven’t yet, it is certainly not too late to begin. Increasing protection with bonds and both lump sum buyout windows and annuity purchases are well worth exploring with an advisor to see if they are appropriate responses..

Unsurprisingly, DC plans are not immune to upheaval. If employees begin contributing less due to economic concerns, DC plans may require smaller matching contributions. Employer contributions may also be affected by reductions to payroll. Employees, many of whom would be considered amateur investors, may panic in times of uncertainty and make financial and investment decisions that are less than ideal for their retirement security. This could lead to less financial readiness at retirement.

Healthcare cost volatility

Healthcare costs have historically been immune to tariffs as most healthcare in the United States is delivered domestically, and prescription drugs have been exempted from these trade policies. The current looming threat of tariffs on imported prescription drugs,¹ however, has generated uncertainty and prognostication. If drug tariffs are imposed, it will increase the cost of prescription drugs and place additional cost pressures on both domestic and foreign drug manufacturers. This may potentially lead to product discontinuations, erosion of product quality, and drug shortages from an overall decrease in drug production.

According to the Milliman Medical Index, prescription drug costs were already the fastest rising component of care for employer-sponsored health plans. The current uncertainty surrounding the Trump Administration’s plans for pharma tariffs is significant and could compound the role that drug prices are playing overall in rising healthcare costs.

Tariffs could also affect medical device manufacturers, increasing the potential for supply-chain disruption and driving up costs.²

Unintended impacts—delayed retirement and layoffs

Employers facing tariff-related cost pressures may look to salary budgets and staffing levels as potential levers to manage costs. But while reducing labor costs can create immediate relief for operating margins, it can also come with unintended impacts on employee benefits and retirement planning.

Lower salaries and market returns could lead employees to reduce their retirement account contributions, thereby shrinking balances and potentially lowering eventual pension payouts. In addition, although the inflationary pressures from tariffs that drive up the cost of living could potentially result in an additional cost-of-living adjustment to Social Security benefits, that increase might not be enough to maintain the purchasing power of retirees, particularly if salary growth lags during employment.

As a result, employees dealing with frozen salaries in addition to market uncertainty and inflationary burdens may opt to delay their retirement. And as employees elect to delay retirement, additional unanticipated employer spending on retirement and health benefits could result.

While hopefully an outlier for most plan sponsors, in particularly challenging scenarios some may adopt an “in case of emergency, break glass” approach and manage costs by conducting layoffs. In addition to potential severance costs and discrimination issues, a key consideration when reducing headcount in response to tariff pressures is inadvertently triggering a partial plan termination.

Federal regulations stipulate that if more than 20% of a qualified retirement plan’s participants are involuntarily terminated, a partial plan termination can occur. This typically results in accelerated vesting or funding requirements, which can increase the organization’s financial burden.

For DB plans, a reduction in force may require both notification to federal agencies and an additional special accounting of company financials (especially if coupled with settlement of liabilities from a lump-sum window or annuity buyout). With significant layoffs, employers may also need to modify their COBRA obligations and account for participation shifts in group health and other benefit plans.

What next? Mitigating risk and planning ahead

Resisting the urge to be reactionary in the frenzy of widespread tariff ambiguity is of utmost importance. As with most things in life, proactive analysis and planning can provide a roadmap to navigating the uncertain impacts of tariffs on benefit costs. Changes in staff, budgets, and investments, along with temporary policies to mitigate some of the disruption from possible pharmaceutical tariffs, may all be part of a comprehensive assessment, but working with your benefit and investment consultants to review scenarios and implement solution-based strategies to deal with both short-term concerns and long-term challenges is key.

Tariff-induced uncertainty can affect both employers and employees. Employers seeking to remain competitive while preserving employee confidence must strike a balance between cost-containing measures and the well-being of their workforce. If decisions are made to reduce salary budgets or staff levels, communication with employees is paramount. Sharing how shifts in salaries or benefits could affect employee retirement timelines and health-related expenses will promote informed choices and minimize disruption.

In addition, conducting workforce planning studies that anticipate the need for talent retention and the risks of reduction in force can be just as important as modeling the impacts that changes in employee behavior (resulting from market uncertainty, lower wages, and increased costs of living) may have on benefit plan costs.

Experienced advisors can help benefit program sponsors navigate this current tariff volatility and avoid the unintended consequences of hasty reflex overreactions. By working with skilled employee benefit consultants and investment professionals to model outcomes, anticipate regulatory requirements, develop strategies, and prioritize clear communication, companies can maintain a robust, future-focused benefits program—even amid the global trade uncertainty.

¹ Nathan-Kazis, J. (May, 2 2025). Trump says drug tariffs are coming. Big pharma execs can’t figure out how much to worry. Barron’s. Retrieved May 8, 2025, from https://www.barrons.com/articles/trump-drug-tariffs-pfizer-eli-lilly-big-pharma-789104f2.

² Mandel, M. (March 19, 2020). The US medical equipment and supply industry: What happened? Progressive Policy Institute. Retrieved May 8, 2025, from https://www.progressivepolicy.org/the-us-medical-equipment-and-supply-industry-what-happened/.