A Closer Look at Benefits Administration in H1 2012: Part 2

Amy L. Gurchensky, HRO Research Analyst, NelsonHall

Part 1 of my mid-year benefits administration update covered several of the largest service providers, typically engaged in TBO services. Part 2 takes a closer look at TRO providers and updates from H&W vendors.

Fidelity Investments: Although it is a private corporation, from time to time Fidelity announces some of its success. H1 2012 was the company’s strongest half sales period in the last five years. It added 838 new DC administration clients, which will add ~522k participants to the ~15.7m it is currently serving. Fidelity has made substantial investments to strengthen its offering that will likely continue to fuel its success.

T. Rowe Price: While not as large as Fidelity, T. Rowe’s Administrative segment continues to report a steady growth rate of 3%. It prides itself on a long tenure rate with its clients and has plans to keep its offering competitive by introducing technological enhancements such as the T. Rowe Price Personal App for individuals and participants in employer-sponsored retirement plans.

JLT: Across the pond, JLT’s Employee Benefits segment, which includes revenues from consulting, outsourcing, and systems / technology, had a 5% growth rate in H1 2012. BenPal, its online integrated platform, is helping the company expand its benefits business internationally, which is likely to continue to have a positive effect on its bottom line.

Benefits providers in the U.K., the second largest benefits administration market behind the U.S. according to the 2012 Targeting Benefits Administration market analysis report, should also enjoy better than average growth due to new opportunities as a result of the automatic enrollment requirement of the Pensions Act of 2008 as well as opportunities in the public sector as budget concerns open doors to outsourcing assistance.

WageWorks: Newly public WageWorks provides a look into the high-technology SaaS H&W specialty services market of consumer-directed accounts including health (i.e., HRA, FSA, and HSA), commuter, and other employee spending accounts. Total revenues increased 29% y-o-y for Q2; its healthcare segment was up 21%. This year, it added US Airways as a client, expanded its contract with GE, and signed a channel partner agreement with Aflac that will add ~5k FSA clients and ~100k participants. It also entered into a reseller agreement with Aflac, which will continue to boost revenues beyond 2012.

Empyrean Benefit Solutions: Another private company touting its success in the H&W market is Empyrean, which has been offering services since 2007. It has set a record with year-to-date new client wins in H1 2012, adding 10 large market clients. The company is expecting 2012 revenues to increase 40% y-o-y.

Service providers who are slightly behind growth targets for 2012 or those who just want to perform better are prepping to make sure 2013 is a success. For some, this means focusing on health insurance exchanges or launching health and wellness offerings, and for others, it’s about enhancing existing offering with technology improvements and educational initiatives.

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What do Benefits Administration Clients Want from HRO?

Linda Merritt, HRO Research Analyst, NelsonHall

What HRO clients want falls into several buyer profiles based on familiarity with outsourcing and organization maturity. The NelsonHall Targeting Benefits Administration (BA) market analysis was published earlier this summer by Amy Gurchensky, and I noticed Amy included differences in client decision drivers by whether they were new to outsourcing or were already experienced in outsourcing. The concept crosses all types of HRO services and matches my running conversations with service providers. Let’s take a look at the following three buyer profiles through the lens of BA:

• Standard buyers
• Experienced buyers
• Progressive buyers.

Standard buyers: otherwise known as first time outsourcers are looking for reduced operating costs, better compliance with regulations, a way to transfer or minimize risk, updated technology and best practices, and improved participant communications channels. Employee and manager self-service and reducing HR administrative burdens are also popular drivers in the initial decision to outsource.

Experienced buyers: otherwise known as second generation outsourcers already have the basics in place and may be ready to broaden the scope of services, obtain more flexible technology, or increase participation in process streamlining to enhance efficiency and improve participant engagement. Changes may include adding new BA services or even consolidating vendors, but it can also include the decision to change to another vendor completely. Cost is still the number one concern, so contract renewals will not be a slam dunk. Providers who are on the ball with changing client needs and increased sophistication should be ready for thorough discussions on price, service, and value.

Progressive buyers: or sophisticated buyers may be ready to use the firm foundation they have built with their outsourcer to create the greatest possible business impact. In BA, this may include total benefits outsourcing where either pensions or retirement plan services are combined with health and welfare services under one vendor to:

• Lower total costs
• Simplify vendor management
• Integrate technologies across the services
• Improve the participant experience.

This is the time to bring out the most sophisticated offerings and analytics and focus on business value; leverage the value of benefits in employee attraction and retention; and optimize total program cost. Once again, existing BA vendors will be vulnerable to pricing concerns and client perceptions about the provider’s top-end capabilities and client retention will remain at risk.

As HRO matures and more clients gain experience in managing outsourced services, expect to see client needs change over time. Service providers can and do quickly tell which HRO profile a new prospect falls into by the language used, initial discussions on services, and outsourcing objectives, etc. It can be a bit harder to see when an existing client, even one satisfied with day-to-day services, is moving from one buyer profile to another. For clients new to BA, if you intend or even just hope to move up to the sophisticated buyer level, consider if the vendor who meets your initial needs will also meet your needs as your organization matures.

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Flexible Benefits and HRO Add Choice for Employees and Options for Employers

Mercer’s What’s Working Survey found that one-third of European participants are seriously considering leaving their organization. This had me immediately questioning why. Does it have something to do with the employee’s benefits package? Probably not in the U.K. since 36% of respondents stated that their benefits package was the primary reason for staying at their organization.

In fact, 30% of survey participants in the U.K. said that their employer’s benefit package was the key reason for joining the company in the first place, up 5% since 2005. Across Europe including France, Germany, Netherlands, Spain, and Italy, the average percent of employees that are content with their benefits package is 50%, representing a general decline over the last five years.

The survey shows what employees value varies by country, culture, and age. While surveyed European employees have many common interests, there is variation by country. Employees in France and Italy were the most dissatisfied over many of the employee value proposition elements studied including base pay, benefits, and development opportunities. In most cases, score varied. For example, employees in the Netherlands were less likely to intend to leave and were satisfied with their benefits, but were dissatisfied with employer assistance in retirement plans and base pay.

With pressure on all aspects of workforce costs, including benefits, what is an employer to do?  One option is to add a flexible benefits program to increase employee desired choice while still controlling costs. Program designs include one or both of the following:

• Employer paid benefit “credits” that employees can use to select the choices most important to them
• Employee paid benefits available through the employer, payable with payroll deductions and usually at better prices than available in the general market.

While flexible benefits schemes have been slow to take off, the continued adoption rate will have a positive effect on flexible benefits service providers since internal HR departments tend to lack the skills necessary to administer these benefit choices successfully. According to Mercer’s European Survey on Employee Choice in Benefits, flexible benefits programs generally meet employer objectives (63%) and are well-received by employees (71%).

Using HRO to administer the programs reduces administrative cost and complexity for employers.  The number of European organizations outsourcing their flexible benefit plan has increased. Specifically, Mercer’s survey found the following:

• 36% of employers outsourced their entire flexible benefits program, up from 28% in 2009
• 33% use a combination of in-sourcing and outsourcing for their flex program, up from 23%
• 16% manage the flex offering in-house, down from 35%.

NelsonHall’s upcoming Targeting Benefits Administration market analysis report will indicate that growth opportunities for flexible benefits are very good as organizations look for an alternative to salary increases and bonuses while meeting the needs of increasingly diverse workforces.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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