The Changing Shape of DB and DC Administration

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

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Where the Action is At in HRO

As a follow-up to my colleague Linda Merritt’s blog last week titled “HRO is Settling in for a Good 2011,” I thought I’d write about where the most action is at thus far. If you were thinking recruitment, good guess, but it is actually benefits administration leading the way in the number of announced contracts in 2011.

In addition to Mercer being awarded a pensions administration contract by Loomis UK Ltd., which Linda also wrote about Mercer in her February 23rd blog, a number of providers have announced important contract awards, including:

Fidelity Investments, after two big five-year contract awards in Q4 2010 by AT&T and Office Depot, in January Fidelity was awarded a five-year contract renewal for total retirement outsourcing (TRO) services by BP America, Inc., a subsidiary of BP. Fidelity will continue to provide administration and recordkeeping for BP America’s 95,000 DB and 48,000 DC and nonqualified deferred compensation plans for U.S. employees. Later in the same month, Fidelity was awarded another five-year contract renewal for TRO services by HP in North America. Under this deal, Fidelity will service all of HP’s retirement plan participants, adding 162,500 participants from EDS who were previously serviced by other providers. In total, Fidelity will serve more than 135,000 DC participants and more than 192,000 DB participants for HP.

Aon Hewitt, in February announced it had gone live with eight new benefits administration clients since the beginning of the year. Across these clients, Aon Hewitt has implemented 12 services including DB, DC, and H&W and has added more than 325,000 participants and retirees to its base of 22 million participants.

Capita, in February was appointed as a preferred supplier for the administration of the Teachers’ Pension Scheme (TPS) by the U.K. Department of Education. This is a seven-year, £80m contract renewal that starts in October 2011 and includes an additional three-year option. A week later, on a smaller scale, Capita won a three-year occupational health services contract by Technip. Capita will provide its Wellness Assessment Surveillance Portal, which gives centralized visibility of health surveillance records to Technip’s 3,000 personnel in Aberdeen and offshore locations.

So will benefits administration continue to be hot this year? I believe it will, though it might be hard-pressed to exceed RPO for the full year in terms of number of contract awards.  As evidenced in the examples above, there are huge volumes of benefit plan participants that are serviced and in today’s economy, clients cannot afford internal resources to manage these programs, nor do they have the expertise and most up-to-date technology. Handling benefits administration is vitally important to employees and retirees, whether it’s the ease of an annual online enrollment or the knowledge of a service center professional in answering DB and DC questions. And it’s not just large companies that need this expertise.  As I wrote in my February 25th blog, mid-market HRO is rapidly growing as well.

A final thought about what will continue to drive contract awards in benefits administration is that buyers are increasingly looking to consolidate their outsourcing services under one provider, as evidenced by Fidelity’s contract with Office Depot. This is a trend I believe will continue and from an employee and retiree perspective is a good thing. I was fortunate enough to leave my long-term employer four years ago with H&W benefits, DB & DC plans, and voluntary benefits, of which all four were provided by four different vendors. Sounds like I should play the number four!

Gary Bragar, Lead HRO Analyst, NelsonHall

Who’s On First and What’s on Second in HRO? A Quick Look at the Xerox/ACS Marriage

The times and the players are a changing in the world of BPO and especially multi-process HRO (MPHRO). Much like the classic baseball comedy bit by Abbott and Costello, it’s hard to figure out who is on which base and who is leaving the field.

This week’s big BPO news is Xerox’s acquisition of ACS in a cash and stock transaction approved unanimously by the ACS board. The transaction is expected to close in Q1 2010, and it includes the ACS human capital management (HCM) and HRO service lines.

There are major plans for synergies, in terms of both internal cost reductions and go to market opportunities. Xerox is expecting significant new revenue growth through integration of its intellectual property with ACS’ services to create new solutions. Xerox also plans to leverage its global brand and client base to help scale ACS’ business in Europe, Asia and South America.

Yesterday’s announcement stated ACS will continue to operate as an independent organization, and that for an interim period, ACS will be called ACS, a Xerox Company. Hmmm…sounds a lot like the transitional ”EDS, an HP Company.” Initial branding aside, can the separation hold for long given the already announced intention to integrate and leverge capabilities and services across Xerox and ACS? Time will tell if they follow the EDS example of initial separation to establish stabilization and detailed plans, followed by full integration and disappearance of the ACS name.  

By NelsonHall estimates, the HCM business line will constitute almost 5 percent of the revenue of the combined $22 billion business. ACS is a major HRO player that has the bases covered anyway you look at it:

•  4^th largest global Benefits Administration provider with almost 8 million participants

•  5^th largest in terms of global MPHRO

•  7^th largest in terms of global Learning revenue

With the acquisition of ACS, Xerox definitely joins the ranks of big league BPO players, and Xerox expects this deal to be a “game changer” to expand its business well beyond its roots in document management. But the HRO big league has been a pretty tough game for the early MPHRO entrants. Some have already left the MPHRO playing field, including Fidelity and ExcellerateHRO, which has been absorbed into HP. 

So there is room on the field, but not a lot of time to figure out the rules for the next generation of HRO. All the players, old and new, single and multi-process, are looking to bring their “A game” as we emerge from the recession. Strategies have changed, technologies have advanced, investments made, delivery capabilities fine-tuned and partnerships strengthened.

I hope ACS and Xerox stay in the game. We need enough strong teams to make a competitive league of providers that can play at all levels, from small, mid and large market to single country and multi-national HRO.

Let’s play ball!

Linda Merritt, Research Director, HRO, NelsonHall