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Micah Fairchild Outsourced Benefits Administration: A Question by Question Assessment

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 By Micah Fairchild

Outsourcing the Administration of Benefits: Answering the Right Questions

Published in late 2011, the most recent HR Systems Survey from CedarCrestone noted a clear trend when it came to benefits administration software: “We have been hearing from benefit solution specialists that as healthcare reforms become more complex to administer due to the changing regulatory environment, more organizations will move from a technology-only solution that they administer themselves”. As if this weren’t enough though, CedarCrestone further noted that a very specific move will start trending for organizations as they seek out “solutions provided by specialists that deeply specialize in the space”—a particularly important aspect for customers considering that not all of the enterprise technology vendors are paying enough attention to these new regulatory complexities.

For example, legislation such as the Patient Protection and Affordable Care Act (PPACA) is resulting in an increasingly intricate and involved compliance environment for employers when managing benefits administration. As such, benefits administration outsourcing (BAO) options are becoming more prevalent and increasingly more widespread (in terms of relegating both processing and responsibility to 3rd-party service providers). And if you’re one of those businesses considering exploiting the outsourcing solution, there are undoubtedly a number of questions that you have.

So, from our research and conversations gathered from customers and HR technology industry analysts, here’s a quick look at the most common questions we’ve come across.

Benefits Outsourcing Question #1: What Are the Major Pros & Cons of BAO?

In a 2012 survey, ADP consulted mid-sized and large enterprises on the various trade-offs between insourcing and outsourcing benefits administration; including what tasks were being conducted by whom and what the organizations’ future plans were. In it, the study found that the main reasons businesses are reticent to outsource benefits were that they a) had a desire to maintain close control over the benefits function; b) had a perceived need to provide their employees with customized service; and (c) were already leveraging significant (and often long-standing) investments in legacy ERP systems. That said, ADP’s research also highlighted that these businesses identified tangible reasons why benefits administration outsourcing was a viable option, including:

  1. Outsourcing benefits administration could provide an improved service at a lower cost;
  2. Outsourcing benefits allows for unfettered access to specialists’ knowledge and expertise;
  3. Outsourced benefits solutions offered assistance with compliance; and
  4. More often than not, benefits outsourcing vendors allowed for access to more advanced HR technologies.

Benefits Outsourcing Question #2: Should All Benefits Be Outsourced?

On a practical level, this depends on individual business needs and the level of specialist knowledge that is maintained in-house. Be that as it may, as SHRM’s 2011 report (Transforming HR Through Technology) noted, many organizations are choosing to outsource only the information support elements of benefits administration. For example, financial services organizations provide their clients’ employees with financial literacy information, allow them to forecast the financial implications of their decisions, and encourage them to learn more about how to manage their 401(k). Many health care insurers provide online services to customers, allowing employees to learn about healthy eating, exercise and health management practices—a fact that, as the SHRM study found, “Employees are empowered and encouraged to take more responsibility for their financial and physical well-being”. It should be noted though that the prime candidates for benefits administration outsourcing tend to be the more technical processes. For example, a recent Towers Watson survey found that 53% of respondents either outsource family medical leave issues or intend to do so in the next two years simply due the complex requirements of the legislation.

Benefits Outsourcing Question #3: Which Individual Areas Are Best to Outsource?

Much like the answer to the prior question, deciding which areas of benefits should be outsourced is largely dependent on your specific organizational needs. However, the above mentioned ADP survey found that the most common individual tasks being outsourced were: COBRA administration, 401(K) administration, FSA administration, dependent eligibility verification, annual open enrollment administration (including reporting), and PTO/LOA facilitation—of which COBRA, 401(k), and FSA were the most popular individual benefits outsourcing choices simply due to their relative complexity.

Benefits Outsourcing Question #4: How Will Outsourcing Be Received by Employees?

Assuming that the results of a more efficient and informative benefits service are realized, then employee reaction tends to be positive in the long run. However, as with any service transition, change management processes and stakeholder engagement strategies are still of critical importance. What often makes the most difference (both for employees and employers) is the leveraging of self-service technology to support that new benefits administration process. In fact, the Aberdeen Group identifies a ‘Best-in-Class’ organization as one in which, “employees have access to their own data (payroll, benefits, HR, etc.) …this goes beyond providing employees with the ability to update their HR data, or modify their benefit elections. Best-in-Class organizations are implementing self-service for managers – at all levels – to allow them to access the data and generate the report they need to make the necessary decisions to meet short term and long term business objectives.” This involvement of employees via self-service transactions is core to the successful provision of outsourced benefits administration.

Benefits Administration Outsourcing – Final Thoughts

Given that the 2011-12 Towers Watson HR Service Delivery & Technology survey reported that 21% of respondents have outsourced HR functions previously conducted in-house within the last 18 months (and 17% will be outsourcing further functions during the next two years), it is arguable that organizations of all sizes should at least have outsourcing on their list of options when it comes time to review their benefits administration processes. Indeed, the increasing complexity of managing employee benefits and the ever more rigorous responsibilities being laid on employers are making benefits administration the “next big thing” in the outsourced services sector. While the questions and answers listed here certainly shed light on the key elements of why benefits outsourcing has become so popular, whether benefits outsourcing is right for your organization is largely a matter of your own interpretation as well as your particular business objectives and internal constraints. End

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ADP’s 2012 study found that the main reasons businesses are reticent to outsource benefits were that they a) had a desire to maintain close control over the benefits function; b) had a perceived need to provide their employees with customized service; and (c) were already leveraging significant (and often long-standing) investments in legacy ERP systems.


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