Outsourced solutions help address skyrocketing healthcare costs, retirement challenges as organizations seek integration across numerous benefits.
By Andy Teng
Like payroll, benefits administration is a foundational service that HR must get right all the time. Whether it’s defined contributions (DC), pensions, or health and welfare, these critical components of employee benefits require careful attention but earn little recognition for a job well done. Moreover, they demand significant resources to administer, whether to complete open enrollment, add dependents, or help employees plan for retirement in light of shrinking portfolios. As a result, many HR organizations have outsourced various aspects of benefits administration to avoid the headaches.
In the current economic climate, benefits administration continues to garner lots of attention, especially as companies look to shed costs and leverage the efficiencies offered by a cornucopia of benefit administration service providers. Whether it’s because HR organizations have been stripped of headcounts, because more competitive pricing is available, or because of a corporate directive to consolidate the vendor base, HR leaders are looking to outsource for the first time or expand the scope of their current engagement. For a bevy of reasons, employers see outsourcing as an opportunity to reduce costs, gain efficiencies and, in some instances, improve quality of service.
Although benefits administration outsourcing has been a long-embraced and mature practice, there is renewed interest among employers to expand aspects of their engagements. For instance, in the area of health and welfare, they see opportunities to better reign in their costs, especially around issues such as eligibility. Furthermore, because many already outsource their defined benefits or DC plans, the inclusion of health and welfare is a comfortable extension of those relationships. And even though total benefits outsourcing (TBO) continues to account for just a small portion of all benefits services, many companies are expressing interest in using just one vendor for all of their needs.
Because benefits administration has been outsourced for decades now, the perception is that as a mature domain, its market growth is modest at best. However, according to research firm NelsonHall, that’s only partially true. Overall, the global benefits administration business in North America is predicted to expand on average seven percent a year through 2013, with the fastest segment in the leave administration and flexible benefits areas. As of 2008, the market was estimated to be worth $16.5 billion but will rise to $22.9 billion in four years.
Pension administration is clearly the biggest part of the market, with defined contributions accounting for the lion’s share of the business. Within the segment, DC is rising at three times the rate of defined benefits administration, although even then it’s only at moderate compound annual growth rate of three percent. Still, the outsourced DC market size will reach $6.8 billion by 2013, while DB will top $5.6 billion, according to NelsonHall. The reasons are clear: As more companies freeze their plans, the number of participants will continue to decline. DC plans, most of which are supported by the ubiquitous 401(k), have now become the main retirement vehicle for Americans, even though it was originally founded to be a supplement to DB plans.
Within health and welfare services, flexible benefits, leave of absence, and reimbursement administration services are rising at rates in the mid-teens. These areas are attracting more outsourced service buyers due to a combination of a desire to reduce fast-rising costs in healthcare as well as a desire to improve the participant experience. For instance, with more workers taking part in flexible spending accounts (FSAs), health savings accounts (HSAs), and health reimbursement arrangement (HRAs), the need for consumer-driven healthcare services has never been higher. Similarly, various factors are leading more companies seeking expert advice and support as a result of changes in the Family Medical Leave Act (FMLA). Another significant legislative change that has led many employers to seek outside help is the recent seismic shift in COBRA subsidies. And with more healthcare changes expected under the Obama administration, companies surely face more compliance challenges in their benefits services. These demands couldn’t come at a worse time, some observers point out.
“In aggregate, companies are just cutting back. Their HR organizations are getting cut pretty hard, but the organizations are being asked to do the same as before but with fewer people,” explained Sue Thomson, HR outsourcing sales leader with Hewitt Associates, one of the market leaders in benefits administration services.
She explained that in this environment, cost savings are dominating discussions on all HR initiatives, and that’s leading to more scrutiny around how benefits are being handled, both from a plan design perspective and from an administration aspect. On the design front, any move that can result in savings is being considered, even if it means some unprecedented changes in the kinds of benefits a company has offered in the past. At a time when the level of matching contributions employers offer is being cut, there is greater scrutiny of all costs. For example, Thomson said in the DB area companies are increasingly seeking fee transparency, concerned with exorbitant and confusing charges that plan participants sometimes end up paying.
The issue has been especially visible with recent investigations by the attorney general of several states looking into pay-for-play violations involving public pension funds. Also, several bills have been introduced in Congress to provide greater transparency in fees charged in defined contribution plans. Moreover, because of the recent losses in participant portfolios, there has been an upswing in investor lawsuits. These actions have led to some 410(k) providers to restructure fees, with a push to base fees on the number of participants in a plan rather than total assets under management by these companies.
“We see a huge uptick in the level of interest in what we are doing,” Thomson claimed, noting that Hewitt has always charged its fees based on the number of participants.
While greater fee transparency won’t necessarily help plan participants strengthen their retirement portfolio, better planning tools might. That’s one area in which benefits administrators are taking a closer look these days as workers adjust their retirement plans in response to the global decline in stock value. How much more austere will the lifestyle of those near retirement be as a result? What are the strategies of retirees as they cope with shrinking income? Should participants plan on working longer than anticipated as a result? These are all questions for which administrators are seeking answers on behalf of their workers.
Indeed the industry is moving toward service that is more personalized and responsive to participants’ needs. That is one reason why technological advancements in self-service are accelerating as providers and software companies look to give customers a better user experience, ranging everything from a more splashy and easy-to-use portal to more predictive planning tools to greater integration with existing HRMS technology that can offer employees single log-in access to all of their benefits information, even if different vendors are handling the administration. In fact, some companies are using their benefits technology platform as the system of record and tying that database to their payroll, HR, and other systems. All of these efforts are geared toward improving the user experience.
“There is continued demand to develop modeling tools for employees—decision-support type of tools,” explained Jeff Miller, president of Mercer’s outsourcing business, one of a few providers of consulting and outsourced administration services. “There is an opportunity for things to be highly personalized on an individual participant level. That’s technology driven.”
Like other aspects of the HRO market, benefits service providers are increasingly raising the value of their solution through technology enhancements, and Miller explained that the bar is being continuously raised in part because employers expect it, vendors push the envelope, and plan participants are becoming more web savvy. Having grown accustomed to technology such as Amazon.com or even their own organization’s sophisticated HR self-service, workers now expect to see similarly powerful online tools from their benefits providers.
Miller said the industry has quickly learned that it needs to evolve at the same speed at which consumers devour web technology. Because they are no longer willing to accept static, bland information, users want providers to roll out data that is not only current but also useful. It’s all about context, and the more comprehensive modeling tools are—helping plan participants make decisions based on relevant data—the more effective these consumers will become at making investment decisions about their future. And the tools are not limited to just retirement planning; they can be just as important in the area of health and welfare, where awareness about consumer-driven healthcare can vary from one organization to another. That’s why such tools are critical to organizations looking to offer more flexible benefits to their employees.
But technology is also important to HR managers as well, some buyers say. One of the reasons why many buyers outsource benefits administration is for access to cutting-edge technology that they would otherwise be unable to implement due to cost or resource limitations That was the case for Local Insight Media, a recent start-up that has experienced tremendous growth since it was founded in 2006.
Elizabeth Mayes, the director of employee relations and HR at the directory publisher and local search provider, explained that the company, which has 1,700 employees in about 40 states and the Caribbean, decided to outsource its benefits administration to ADP along with core HR administration, payroll, HRMS, and other services because it needed to set those up quickly and didn’t feel these services were core to its mission. She explained that an especially important requirement of the solution was to have seamless integration of benefits data with other HR information. To do this internally would have been highly difficult and costly.
“We looked and were hard-pressed for a solution like this. The next step up was the Oracle line of products, which is way too heavy-hitting. I would recommend this product [from ADP] to people doing a lot of M&A work or people who want to get value and get a lot of the administrative block and tackling done,” she said.
Mayes’ experience was not unlike that of another company, whose benefits administrator agreed to discuss her outsourcing experience in exchange for anonymity. Working for a 9,800-employee organization that outsources to a SaaS-based provider of benefits administration services, she said the company had invested in a Lawson-based HR system but its IT department took a painfully long time to even implement a version upgrade. Self-service seemed to a pipe dream before the company outsourced.
“The problem with Lawson is that without self-service, it’s all manual entry and allowed huge opportunities for errors,” she said, adding that since outsourcing to the provider, the company has seen a “huge” decline in the number of entry errors. This has led to cost savings that have paid for the outsourcing.
Unquestionably cost reductions are behind much of the interest in outsourcing health and welfare administration these days. That’s because healthcare costs are rising more quickly than for many other expenditures, and companies see opportunities to easily slash costs that they had not considered in the past.
This is especially evident in the area of dependent eligibility, where employers have been lax in enforcement for years. As a result, they’ve been paying for years healthcare and other benefits for dependents who are not eligible. One source estimated that five to 15 percent of covered employees are ineligible. And there are other areas within the health and welfare domain ripe for scrutiny.
“There has been a lot of focus on dependent eligibility. Everybody is trying to make sure they are only paying for the appropriate people,” said Rich Gallun, CEO of bswift, an outsourced benefits administration service provider. “Another area is to make sure not to overpay the healthcare carrier and making sure the payment process is as streamlined and efficient as possible.”
Gallun and other providers say eligibility has become a focus for many organizations because it can be easily addressed through a rigorous administration process, but for some HR groups already hampered by a cutback on bodies, implementing process changes in this environment is highly difficult. That’s why service providers are playing an pivotal role in these efforts to reign in healthcare spending.
“Everyone is looking for the low-hanging fruit, but if you can eliminate, say, two percent of your healthcare spend, that’s a huge number,” he noted.
Other areas of potential savings companies are exploring include leave of absence and short-term disability spending, which can be highly labor intensive and difficult to keep up with in terms of compliance requirements. According to NelsonHall, the market for leave of absence administration services will grow an average of 16 percent annually through 2013, expanding from a market value of $625 million this year to $1.1 billion by then. This growth will be driven by companies seeking to gain cost savings, especially among mid-market companies, and by changes in the Family Medical Leave Act (FMLA).
Indeed one way in which companies are approaching health and welfare spending is to integrate functions, such as marrying absence management with wellness programs. By connecting the dots, they can better manage total health outcomes through providing risk assessments, rewarding employees’ good behavior, and coaching them to look after chronic conditions.
Rohail Khan, managing director of TBO for ACS, explained that providers are helping companies understand how they can better control health spending simply by utilizing online tools that integrate services—tools that both employer and employee can access. “What they haven’t had is integration of that portal or intranet with the services they have,” he explained, noting that ACS recently launched an online platform that offers greater integration.
Indeed, with better integration and with companies moving to multi-process benefits outsourcing, is the market now ready to fully embrace TBO? Will vendor consolidation help accelerate this movement?
TBO on the Rise
According to NelsonHall, TBO remains an immature practice, with few companies outsourcing all of its benefits administration to one vendor. Still, it believes that will change in the future, with this market segment growing 15 percent a year. And there are many proponents of a comprehensive solution, including buyers who have gone down that path.
Steve Mirante, senior vice president of HR specialty services at media giant CBS, said when the company first considered a TBO solution with Mercer, it had concerns about putting “all of its eggs into one basket.” Prior to implementing its current solution in 2008, the company relied on a disparate solution that included different vendors for 401(k), pension, and other services. But when these were consolidated under one provider, CBS found that the engagement was well received among employees, especially because of the single sign-on aspect.
“Participants see everything. They get an integrated view across all their plans, and it’s organized around life events,” a highly pleased Mirante said. “We have gotten a lot of positive feedback. The ease of access is very, very important. The portal allows you to monitor where people go and what questions they are asking. That’s been very helpful for us.”
Mirante’s experience might be typical of TBO buyers, but don’t expect everyone to go down the same path. Single-process benefits outsourcing continues to account for the overwhelming majority of engagements and will likely to continue for years to come. Still, as more converts to TBO spread the gospel about an integrated solution and as providers roll out better solution, expect these types of engagement to be on the rise.
Because benefits administration outsourcing is a highly mature market, conventional wisdom is that it’s a staid business that has little to offer in innovation. As organizations look hard at reducing costs, doing more with fewer resources, and seek greater integration of data and services, they will no doubt find a dynamic industry that’s rising up to meet these demands.