‘Free’ Plan Implementation Can Come With Big Costs

Andrew A. Adams, with Strategic Benefits Advisors, explains the unexpected near- and long-term costs that often arise when converting to a new plan provider.

“Free implementation” has become a ubiquitous element of benefit plan administration proposals today. That’s because the biggest impediment to plan sponsors switching benefit administrators is the enormous up-front cost of implementation.

It’s understandable that plan sponsors seeking improved servicing or a better deal would find an offer of free implementation appealing. But, rest assured, with free implementation, you get what you pay for. All the processes necessary to make the switch will cost your selected vendor a lot of money — sometimes upward of a million dollars for large organizations with complex benefits and legacy plans. More often than not, a small portion of these costs are eaten by the vendor-elect, and the balance is quietly folded into the plan sponsor’s extended contract — so either the plan sponsor or the participants pay most, if not all, of the conversion costs over time.

But there’s a second part of the equation that few plan sponsors consider. On top of paying vendor conversion costs that are buried in the contract, plan sponsors still must set aside significant internal resources and funding to support the implementation. To be done correctly, regardless of what any vendor will tell you, the plan sponsor must remain heavily involved.

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Understanding the true cost of implementation will help plan sponsors evaluate potential benefit administrators and initiate the implementation process with eyes wide open and a more realistic budget.

Don’t Cut Corners

Plan sponsors who initiate implementation unprepared to perform heavy lifting are often tempted to cut corners. But, be warned, shortchanging the process will transfer legacy problems—or introduce new ones—to your new vendor.

Programming Specifications

When implementing a new vendor, requirement documents must be developed for every imaginable aspect of the plan and its administration. These are extremely detailed documents that must be carefully reviewed, corrected and re-reviewed numerous times. Sometimes there are many sets of documents; we were once involved with a conversion that had 76 different specifications documents, some of which were over 100 pages in length.

While the new vendor will attempt to create an initial draft, it is incumbent on the plan sponsor to review minute details for accuracy. This can be especially challenging if a vendor’s draft is based on plan documents, previous vendor specifications or large volumes of supporting documents that have become dated or inaccurate over time due to factors such as mergers and acquisitions (M&As). Despite what many will tell you, this will take a significant amount of your organization’s resources.

Once the plan sponsor signs off on specifications, any later changes that have to be corrected down the road will come with a hefty price tag—not to mention countless quality problems. No change in vendor will relieve the misery caused by specifications that aren’t completely correct.

Data Integrity
Plan administrator problems are not always the product of poor vendor systems and processes. They are commonly the combined product of poorly organized plan sponsor data and plan specs that were never executed correctly. Plan sponsors must deliver clean data to benefits administrators to receive quality administration and participant servicing.

Data clean-up is not included in a free implementation, so plan sponsors should be prepared to submit well-organized, accurate data or include a budget for a vendor to clean their data for them. Plan sponsors should note that data clean-up charges can be significant.

Acceptance Testing

Plan sponsors and vendors almost always shortchange acceptance testing. To carry your new implementation over the finish line, prepare to allocate a full four to six weeks for acceptance testing, not three or four days as vendors commonly propose. Since vendors usually do not supply test cases, plan sponsors should assign a resource to prepare test cases across a multitude of scenarios, track results, drive vendor corrections and ensure problems are resolved upon retesting.

Also, while rarely suggested by vendors, many areas of administration must be tested beyond the core recordkeeping system—including the call center and its representatives.

Trailing (‘Day Two’) Items

Oftentimes after implementation, plan sponsors are eager to move on to the next project. However, there will be numerous issues that crop up leading to the live date that must be tracked, researched and followed up on. Without a plan sponsor resource dedicated to tying up loose ends, plan sponsors risk seeing important issues compound for years before they are noticed.

Actuarial Expertise

For defined benefit (DB) implementations, plan sponsors should ensure that vendors assign a senior-level actuary to their implementation team, particularly in the case of large DB plans with unique legacy provisions that have been around for decades. Frequently, legacy provisions are not documented or well defined. While the vendor’s team roster may appear to include a senior actuary, that person can’t just be window dressing. In these instances, vendor actuaries must roll up their sleeves and assume detailed involvement in specification development and review, test case development and the testing process itself.

Actuaries are essential to resolve plan discrepancies, interpret complex calculations and research technical issues. Even a very strong vendor implementation team is no substitute for the technical knowledge and advanced skillset possessed by an actuary. If the vendor does not supply a quality actuary at a detailed level, the plan sponsor will likely have to supply one themselves—at significant cost.

Switching Vendors Requires Preparation

If you think changing vendors will improve participant servicing or yield long-term cost savings, then your organization should certainly proceed. As you embark on the search for a best-fit benefits administration vendor, plan sponsors should be aware that “free” comes at a cost. Do your homework and be prepared to dedicate a full-time project manager to the job along with all the other internal resources necessary to successfully execute the specification process and testing. And if it’s not feasible to allocate these full-time internal resources to the project, expect to hire an outside firm with strong expertise in successfully executing complex benefit administration implementations.


Andrew A. Adams is founder and principal of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm that solves benefits issues for clients with 1,000 to 300,000-plus employees. Adams has 33 years’ executive-level experience in benefit plan administration and consulting. He can be reached at info@sba-inc.com.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.