Blend of outsourcing, in-house work common

A majority of companies outsource some employee benefits administration functions but handle internally those functions that they can administer cost effectively, according to a Watson Wyatt Worldwide survey.

Almost 60% of the responding companies reported using a combination of internal and external resources when administering their pension plans, according to the survey, "Finding the Right Mix for Benefits Administration." Most of the 315 companies that responded to the survey were large and midsize companies.

About 27% of respondents completely outsource their pension plan administration functions, while the rest handle all of these functions internally, the survey found.

Processing benefit payments is the most commonly outsourced defined benefit plan administration function, with about 80% of large and midsize companies using outside vendors to perform the function, according to the survey. In contrast, employee interaction services, such as offering employees benefits advice, are the least likely pension function to be outsourced, with only 31% of large and midsize companies using an external provider.

About 86% of survey participants said they use both internal and outsourced resources to administer their health and welfare benefits. Only 3.5% completely outsource these functions, while 10.5% handle these functions internally, the survey found.

Functions such as flexible spending account and COBRA administration are the most likely health and welfare administration functions to be outsourced, with 85.5% of large and midsize companies outsourcing FSA administration and 72.7% outsourcing COBRA administration. Only 29.3% outsource employee interaction functions, the survey found.

Most companies retain responsibility for employee interaction because internal human resource service centers produce lower costs and higher satisfaction rates than outsourced human resource centers, according to a companion study by Watson Wyatt, "Trends in HR Service Center Administration." That study examined responses from 87 of the surveyed companies that have either internal or external service centers.

Half of the survey participants with internal service centers reported an average annual HR service center operating budget of $58 or less per full-time employee and retiree. At the same time, only half of companies that outsourced their service centers had costs below $119 per full-time employee and retiree, the survey found.

"There is a tremendous cost advantage of insourcing the people side," said Rick Hubbard, global practice director-technology solutions for Watson Wyatt in Cleveland.

Forty-four percent of large companies surveyed had internal HR service centers, while only 19% of midsize companies had such centers. "The larger companies will continue to insource more of the employee interaction activities," he said. "They have service centers and technology to efficiently handle that employee interaction. The smaller and medium-size companies may not be able to do that as cost effectively."

Reed Elsevier, a global publishing company with 35,000 employees, takes a blended approach to outsourcing it benefits functions.

The company's U.S. operation, based in New York, outsources its pensions benefits calculations and 401(k) administrative functions, due to the complexity of the calculations involved and the amount of money administered in the plans, said Anne Silverman, vp-compensation and benefits, The Americas.

But the company handles most health and welfare administrative functions internally because it has access to a shared service center for all company operations, which has a sophisticated computer system that can handle these functions, she said.

"We know we're doing it very effectively and much less expensively than using an outside consulting firm," Ms. Silverman said.

The Watson Wyatt survey also queried companies on the importance of various goals in selecting benefit administration vendors and products, as well as on how successful they were in meeting these goals.

With regard to pension plans, 86.7% of respondents said that they were successful in increasing productivity, but only 67.3% reported that they were able to reduce costs. On the health and welfare side, 85.7% said that they were able to increase productivity, and 75.0% said that they were able to reduce costs.

"Costs continue to be a focal point for these decisions in the beginning, and people are somewhat disappointed with cost savings," Mr. Hubbard said.

Companies with a blended approach are more likely to reduce costs and meet productivity goals since more sophisticated technology gives companies a greater ability to mix and match products and vendors to optimize benefits administration, according to the survey. The most consistent finding is that "the cost seems to be minimized with this blended approach as opposed to outsourcing everything or insourcing everything," he said.

The Watson Wyatt surveys-"Finding the Right Mix for Benefits Administration" and "Trends in HR Service Center Administration"-are available online at www.watsonwyatt.com/research/reports.asp. The cost is $45 for each.