Posted tagged ‘defined benefits plans’

The Changing Shape of DB and DC Administration

February 3, 2012

Practically all large market organizations have already outsourced defined benefit (DB) and defined contribution (DC) administration. Therefore, DB and DC administration contract activity is more about competitive wins.  When reading these contract award announcements, the first question I ask myself is, why did the client change service providers?

Some clients have a preference in the type of vendor used due to the large-scale financial worth of these portfolios. Some client executives prefer the independence of a non-financial administrator like Aon Hewitt, ACS/Xerox, or Mercer, while others prefer the industry closeness of a financial-type provider like Fidelity, T. Rowe Price, or Vanguard.

Other reasons for changing vendors include client dissatisfaction with the existing service or wanting to obtain a lower price or perhaps both.  Another cause revolves around vendor consolidation for both total retirement outsourcing (TRO) and total benefits outsourcing (TBO), which also includes health and welfare (H&W) administration. Consolidation is driven by a desire to reduce the number of vendors to a select few. Mergers and acquisitions also add to consolidation as integration occurs.

Last year produced a string of TRO and TBO contract awards due to consolidation, including the following:

  • HP in North America: Fidelity became the exclusive TRO provider for HP, which had ~162,000 participants from EDS being served by other providers
  • Office Depot: Fidelity was awarded this new TBO contract from three different providers that had administered the 401(k), H&W, and stock plans.

With an estimated $11bn market at stake, both financial and non-financial administrators need to remain competitive in the TRO and even TBO space. As a result, benefits administrators are offering additional service features such as automatic enrollment and automatic contribution escalation for client-employers, and resources to educate participants so that they become more accountable for their retirement savings.

This strategy is reinforced by Aon Hewitt’s recent survey of 500 large market U.S. employers representing more than 12m employees. The survey found that just 4% of employers are very confident that their employees will retire with enough savings, down from 30% last year. Examples of services and solutions recently launched to create a competitive edge include:

  • Aon Hewitt’s DC advisory offering: providing online personalized advice and professional management with Financial Engines serving as a sub-advisor
  • ADP’s strategic advisory services group: helping clients maximize the value of in-depth benefits data and analysis
  • Mercer’s RetireTALK: an interactive website with hypothetical scenarios, designed to motivate and educate users on retirement planning
  • Fidelity’s myPlan tool: offering online retirement advice based on answers to a few questions.

The Aon Hewitt survey also found that only 10% of employers are very confident that their employees are taking accountability for their own retirement success.  The remaining issue then is how to encourage employees to utilize these services and solutions that are already available to them and which service provider will best help both the employer and employees achieve their goals.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

 Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

The Changing World of Benefits Administration Outsourcing

November 17, 2010

I am pleased to report that NelsonHall recently published its “Targeting Benefits Administration” market analysis, and that it is chock-full of valuable findings on where this market segment is and is going over the next several years. To begin with, we expect a moderate growth rate of 4.8 percent for overall benefits administration through 2014. The Health & Welfare (H&W) segment, which covers H&W administration, reimbursement accounts, leave of absence and COBRA/HIPPA administration, remains the most dynamic part of the benefits administration outsourcing market, and will continue to bring the most opportunity for growth at a robust rate of 11.6 percent.

Total retirement outsourcing (TRO) is currently the largest portion of the benefits administration market at 67 percent. But that share will decline to 54 percent by 2014 as H&W’s share increases from 31 percent to 43 percent. With its maturity, the continued decline in defined benefits plans and economic pressures on defined contribution plans, the opportunities for growth in TRO will be hard to come by.

On the other hand, many of the major benefits administrators are also major benefits consultants, and the opportunities for consulting will offer more growth. Plan sponsors still need to reduce administration costs and provide a quality employee experience, and it is likely that more plans will close. Combined with the activity driven by the boomer generation moving through the retirement process, this should lead to improvement projects that help offset the lower covered participant populations.

Investment consulting is another growth area for plan sponsors and participants. In the U.S., regulations have changed to allow both greater information provision and automatic enrollment. Hewitt (now Aon Hewitt) is capitalizing on this trend through its acquisition of EnnisKnupp to add to its investment advisory services, and Mercer is partnering with Robert Powell to increase financial analysis and retirement advice.

The high rate of M&A activity in 2010 was largely about growing H&W capabilities through acquisition and partnership. Consumer directed benefit capabilities, wellness, advocacy, dependent audits, retiree health care services, absence management and flexible spend accounts were all subjects of acquisitions and partnerships this year.

With the highest growth rate, expect continued H&W activity into 2011. ADP’s CEO, Gary Butler, was quite open during its recent 3Q 2010 earnings call that the company is assessing further movement into the health care arena, even as its integration of Workscape is underway. Given that H&W continues to be one of the hottest areas of NelsonHall client inquiries, I am sure it is not the only HRO service provider considering further expansion plans in this area.

Some of the drivers for benefits administration outsourcing have been reprioritized and new concerns added, reflecting the continued slow and uncertain recovery amidst ever escalating health care costs. While the number one driver, reduce operating costs, has not changed, new is access to quick ROI-related results, which has really opened up the market for point solutions like dependent audits and leave administration. Jumping up in priority is help in navigating the complexities and requirements of regulatory compliance and changing legislation.

Look for more on the changing world of benefits administration outsourcing in upcoming HRO Insights blogs.

Linda Merritt, Research Director, HRO, NelsonHall