The good news is costs are lower, but don’t expect much more retrenching. Just make sure to benchmark before going out for deal renewal.
by Felicia Palmer
In a time of financial turmoil in world markets, it is encouraging to know that HR services clients are reaping the benefits of greater marketplace efficiencies. The clearest evidence is that benefits administration fees have dropped dramatically during the past four years. While the magnitude of decrease differs by benefit program—401(k), pension, or health and welfare—in all cases, the cuts exceed 20 percent.
TPI’s benchmark pricing data for companies with 20,000 to 75,000 employees demonstrate that fee reduction has been the most pronounced for health and welfare administration services, fueled by a number of factors including increased incidence of market reviews. In addition, some Tier 2 service providers have begun participating more often in larger client opportunities, and their opportunistic pricing has influenced the competitiveness of the final awards.
The ongoing per employee per year (PEPY) fee is not the only one on the decline. In the past, health and welfare implementation fees have cost clients as much as $2 million. In the past 15 months, however, TPI has seen fees for each of these services ranging from $500,000 to $750,000. And the trend of zero (upfront) implementation fees for defined contribution plans is expected to continue.
Another downward pressure on pricing is greater adoption of self-service. Service providers have re-engineered their benefits web sites to promote easier navigation, incorporate more integration (across benefits), and provide higher-performance transactions, resulting in fewer client calls and lower delivery costs.
Further, in recent years Tier 1 global service providers have moved a greater share of back-office HR service delivery operations to India or other low-cost locations, which has resulted in cost savings for clients. Typical benefits administration activities managed offshore include data uploading, transfer and reconciliation; eligibility and other programming; certain calculations; and very limited customer service (e-mail response, for example). However, to date, with the exception of a few large clients, plan sponsors have not embraced the idea of fielding live calls in offshore locations.
What Plan Sponsors Should Expect
TPI believes that competition will continue to drive benefits administration fees down, but not at the rates we have experienced in past years. Currently the trends show:
- Prices are stabilizing. The downward trend is slowing in the health and welfare sector and has been flat for a few years in the pension space. We do not see opportunity for further cost reductions in the near future for 401(k) plans. However, new and/or revitalized entrants to the market may further influence competitive pricing. For example, former professionals of Tier 1 health and welfare outsourcing players are entering the market with lower-cost solutions or platforms.
- Benefits administration providers no longer typically build in an annual increase to reflect inflation in their bids. This effectively represents a fee decrease as you renew your contracts without this provision.
- For those providers in a position to move services offshore, a good share of back-office offshoring has already occurred. Limited additional opportunity exists.
- Finally, we don’t anticipate that clients will broadly embrace offshoring of their HR contact centers. Concerns about employee satisfaction outweigh the fact that domestic contact centers are the primary cost burden in provider solutions.
Given the reduction in fees during the last three to four years, many plan sponsors in five-year contracts may find themselves wondering if they could obtain an improved fee quote from their existing provider(s).
Before a contract comes up for renewal, it is wise to benchmark current fees against market competitive rates. This exercise is fairly straightforward and would provide a basis for renegotiation. The process also presents an opportunity to benchmark contract terms and performance standards (service level agreements).
Work with your provider to understand the underlying assumptions behind their fees for call volumes, call length, etc., and review web portal utilization and the factors that are restricting greater usage by your participants. By working collaboratively, you can seek to move the dial on cost.
Armed with benchmarking results, you can update your commercial relationship without disrupting service. It is a win-win for both sides—no cost of sale to the provider and no time-consuming and costly transition for you and your participants. If the service provider is unwilling to negotiate or it has been more than 10 years since you looked at market capabilities, then you may need to conduct a formal market evaluation.