Table of Contents | Published in April 1999

Outsourcing's Next Wave

Why total benefits outsourcing eventually will benefit plan sponsors large and small

By PS | April 1999

Why total benefits outsourcing eventually will benefit plan sponsors large and small

Patrick J Walsh
Merrill Lynch

Having been both the head of human resources for Merrill Lynch & Company, and leader of Merrill's benefit recordkeeping and administration unit, I have an unusual perspective on the future of total benefits outsourcingÑ dealing with a single outside firm to handle everything from defined benefit and contribution plans to health and welfare, and even the new "employee life cycle accounts."

As a provider, I know sponsors are interested in the idea, because I hear from them frequently. But the idea is still in its infancy. Providers have not proved their capability to deliver integrated benefits seamlessly. Clearly, fewer than 5% of retirement plan sponsors coordinate all their benefits through a single vendor.

But it is just as clear to me that many sponsors in the 21st century will adopt this approach. Total benefits outsourcing gives employers a competitive benefits edge. It saves money. It reduces the kinds of delays that vex employers and employees alike. And it improves service to employees, which is crucial in attracting, retaining, and managing the workforce in an era when highly skilled employees will be in even greater demand than they are today.

Sponsors and providers need to be able to call upon the same resources before they can implement successful total benefits outsourcing: a team of skilled individuals with deep experience and knowledge of each area of benefits; the ability and desire to make the huge technology investments needed for this purpose; and a broad distribution and support system for the service. Currently, very few firms have these capabilities. But more of them will in the future; this concept's efficiency will generate extraordinary demand as it proves itself in the marketplace.

For Merrill Lynch, total benefits outsourcing is the recordkeeping and administration of all benefits needs. As recently as a decade ago, it would have been well nigh impossible for a single vendor to handle all of these tasks competently. Technology has changed that; but technology is also expensive. Few employers can afford to budget sufficient capital investments in state-of-the-art hardware and software that are required by today's complex benefits programs. However, outsourcing firms have the ability to spread the cost of technology over thousands of clients, eliminating the need for employers to duplicate this elaborate infrastructure.

In the area of voice response technology alone, programs have developed from basic phone answering to menu-driven choices and voice recognition as new technology develops at warp speed. Many plan sponsors cannot afford the capital cost or internal resources necessary to provide such state-of-the-art services. The same is true for benefits outsourcing companies. Of six companies leading the outsourcing charge 10 years ago, three remain today.

We are seeing a similar evolution with respect to technology investments required by Y2K. I hear from a variety of plan sponsors that they have been asked by vendors to support the cost of Y2K compliance because the vendors themselves cannot afford or are unwilling to bear the expense to convert to new systems.

Barriers to outsourcing
Technology alone does not solve the total benefits outsourcing riddle. Building a successful platform also requires substantial investment in backup facilities, as well as the people required to make everything work. And who are the right people? As you are well aware, benefits staff must be experts on the governing laws of the benefits world, from ERISA and COBRA to HMO regulations, as well as current practices.

Another barrier to total benefits outsourcing is the misperception that companies are already outsourcing their benefits recordkeeping and administration. Only a handful do. Most are partial outsourcers, who hire multiple vendors to administer their 401(k)s, pension plans, health and welfare plans, or benefits statements, and then continue to handle the costly burdens of employee data feeds and employee interaction.

In the future, though, this kind of inefficiency will not be tolerated. Today, most large companies have about eight benefits administration relationships. Tomorrow, they will have one.

Today, companies are getting their feet wet using the Internet as a benefits tool. Tomorrow, the Internet (or its wireless successor) will be the vehicle for employees to enroll in their benefits plans, make investment decisions, choose benefit options, sign up for plans, model their own asset allocation strategies and, ultimately, engage in financial planning to get control of their total financial picture.

Today, benefits are looked at as separate from personal finances in the employer/employee relationship. Yet, a recent Merrill Lynch study found that the most prevalent source of stress on the job was financial concerns. Tomorrow, technology will enable companies to empower their employees with total life planning resources, thus enabling them to be more productive and more loyal.

Today, employers focus on the employees who remain with their companies. Tomorrow, using the resources of total benefits outsourcing, they will be able to offer departing or retiring employees continuous stewardship without incurring additional costs.

Today, only the largest of companies are benefiting from total benefits outsourcing. But just as 401(k)s have spread from large to small employers in recent years, total benefits outsourcing eventually will benefit smaller companies as the technology investments are leveraged to meet their needs.

Today, your benefits staff likely provides megabytes of payroll and employee data to your multiple benefits vendors, and then juggles the timing of each to make sure employee statistics are in sync. Tomorrow, your human resources specialists will be able to focus on helping your employees maximize their potential as contributors to your company and to society, while your outsourcing partner manages your integrated benefits database, your vendor relationships, and your employee inquiries, most of which will be handled via the Internet and/or voice recognition technology.

Today, most companies are administering benefits the way they did in the 1970s. Tomorrow, they will reduce costs in human resources, database management, and vendor overhead while providing more timely, better service to their employees.

Today, when you think of your benefits departments' biggest headaches, they are usually mundaneÑsuch as how to coordinate timeliness of data so that, if an employee leaves the company tomorrow, all clocks stop at the same timeÑfrom pension calculations to that 401(k) loan she took out yesterday. Another concern is how to stop pension payments when your life insurance area is informed of a retired employee's death. Total benefits outsourcing will synchronize those clocks and eliminate those headaches.

Despite your best efforts, being involved with benefits is also a headache for your employees. Instead of waiting 20 minutes to scroll through each of your 65 mutual fund options on your voice response system, voice recognition technology in coordination with your online benefits site, all handled by your total benefits outsourcer, will make investment selection and direction simpler, faster, and more effective.

Is total benefits outsourcing in your future?
Here are a few questions to consider:

1. Will you be able to administer benefits better/faster/cheaper by outsourcing? Conduct an honest, internal assessment of any and all costs of handling benefits internally, then consider the tradeoff between cost and total control.

2. Will your current outsourcing relationships be able to meet future needs as your company grows and changes? Many times companies do not realize what they are missing in terms of a real benefits partner, who understands their corporate culture, their business strategy, and how that might impact benefit plan design in the future.

3. Will outsourcing help you take advantage of economies of scale across your different benefit plans? For example, non-discrimination testing may apply to a number of benefits you offer, and an integrated benefits approach could reduce redundant regulatory hoops.

4. Will global expansion be part of your firm's future? Without a total benefits outsourcing partner, you could be burdened with innumerable challenges ranging from non-portable benefits issues to country-specific compensation practices.

5. Will acquisitions be part of your company's growth strategy? If so, you will need to understand fully the benefit plans of potential targets to watch out for any land mines.

6. Will your employees benefit from a better understanding of, and appreciation for, their total benefits package? If so, total benefits outsourcing can make life easier for you and your employees by providing access to all benefits information through one point of contact.

Clearly, the future may be here sooner than you think.