The Yellow Brick Road to Financial Growth in Benefits Outsourcing

There are a variety of ways to grow HRO service provider income. Well-traveled roads include winning new clients or expanding services with existing clients. Another avenue is to cross-leverage consulting and outsourcing to build revenues for other service lines. Now, a new path has emerged and it looks like a yellow brick road to generating revenues: provide advisory services directly to defined contribution (DC) plan participants and not just to the plan sponsors.

According to The Financial Engines National 401(k) Evaluation report, approximately three out of four participants are not on track to comfortably retire by age 65 (i.e., they can’t replace 70% of their pre-retirement income with their 401(k) and social security). In addition, 34% do not have diversified portfolios and/or have inappropriate risk levels and 39% of participants do not contribute enough to even receive the full employer match. With DC plans replacing traditional pension plans for many employees, effective participation has taken on increased importance.

Participant DC service options were greatly expanded by the Department of Labor’s regulations, starting with the Pension Plan Act of 2006. Now, DC plans can offer automatic enrollment into qualified default investment alternatives, automatic saving escalations, and investment advisory services. Great, but the regulations are complex and are still being clarified and there are fiduciary responsibilities that must be addressed to provide a safe harbor to the plan sponsors and appropriate protections for the advisors. For BAO providers who have the expertise and fear not to tread on a road still under a bit of construction, this is a growth opportunity.

Amy Gurchensky, one of my NelsonHall HRO colleagues, just added tracking service coverage of Aon Hewitt’s new integrated advisory offering for its DC plan participants through its subsidiary, Aon Hewitt Financial Advisors. Aon Hewitt continues to expand its wealth management and retirement financial services for employers and participants. In 2010, before the merger with Aon Consulting, Hewitt had acquired the investment advisory firm EnnisKnupp.

Aon Hewitt selected Financial Engines to be the sub-advisor and provider of the advisory platform. As Amy notes in her analysis, Financial Engines also provides services for ACS, a Xerox Company, Fidelity, Mercer and others like ING and J.P. Morgan. It is important then that Aon Hewitt is wrapping the standard third party offering in with its own materials so it will be able to extend a new service bundle that creates differentiation.

The bulk of retirement investment consulting revenues will continue to come from services to the plan sponsors, but adding a new road to growth in ancillary services is valuable and this one looks particularly golden. Given the millions of participants with the major BAO players, participant investment services will be a valuable win-win for the employers, participants, and service providers.

Linda Merritt, Research Director, HRO, NelsonHall

The Compliance Rules, They are a Changing (and Present Opps for HRO)

Compliance is not always the most exciting topic, and being the manager of workforce safety, leave of absence and FMLA were on Kris Dunn’s Workforce.com list of the Five Worst Jobs in HR. Exciting or not, compliance is important to both employees and employers, and is a major regulatory focus of the current U.S. administration. It is also an opportunity for HR outsourcing.

I was reading the just-published U.S. Department of Labor’s Fall 2009 Regulatory Plan agenda (really, I was…I need to get a more exciting life!) and the list of proposed changes is very long and touches on many HRO service areas. Here are a few examples of proposals:

•  LOA/FMLA: review the implementation of the new military family leave amendments to the Family and Medical Leave Act, as well as other provisions of the FMLA regulations that were revised and implemented in January 2009

•  Benefits: Clarify the circumstances under which a person will be considered a fiduciary when providing investment advice to employee benefit plans and their participants and beneficiaries, and require defined benefit plan administrators to provide all participants, beneficiaries and other parties with detailed information regarding their plan’s funding status  

•  OSHA: collection of additional data to help employers and workers track injuries at individual workplaces

•  Wage & Hour: update decades old recordkeeping regulations in order to enhance the transparency and disclosure to workers as to how their wages are computed, and to allow for new workplace practices such as telework and flexiplace arrangements

While large-scale HRO is not usually driven by compliance issues, it is a benefit of outsourcing increasingly valued by buyers.

Continually updated regulatory compliance support and reports can be designed into HR services delivery systems and make any audits much easier to support with thorough documentation.

Training and coverage of required reviews are also a part of a compliance system. On Monday, my NelsonHall colleague Gary Bragar and I were catching up on the learning activities of a multi-process HRO provider and we briefly discussed compliance training. Too often it is funded at the lowest possible level and designed to meet the letter of the regulations and to document participant coverage. It can entirely miss the larger point of application in real work situations as well as the value and spirit behind the regulations.

Significant expertise is required to manage benefit and health and safety programs. Having an HRO partner that keeps up on the regulations and can help buyers design and administer a cost effective program brings real value to the business, HR and to employees. Compliance tracking and reporting can indeed be tedious, but compliance coverage and training need not be.

Learning vendors — be creative  and show clients how they can leverage outsourced compliance training services to provide coverage that really works and is still low cost. 

At the end of the day, compliance is about value-based fairness, and impacts the real lives of employees and communities and an HRO provider partner can help companies maintain the balance between compassion, compliance and cost.

Linda Merritt, Research Director, HRO, NelsonHall