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Outsourcing of benefits extends beyond administration

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More employers are moving away from one-stop, total outsourcing of employee benefits and opting instead to selectively farm out key functions to specialized vendors, experts say.

"Benefits administration is a relatively easy thing to outsource--it's been going on for years, and I don't think that's going to change," said Helen Darling, president of the Washington-based National Business Group on Health. Where the "complex decisionmaking" for employers comes in is not with choosing what functions to outsource, but rather "deciding how to outsource," Ms. Darling said.

Companies increasingly are using a "best-in-class approach" to benefits outsourcing, noted Bill Crowley, vp, employee benefits outsourcing for Aon Consulting in Milwaukee. "Clients are gravitating towards service providers that have demonstrated a particular expertise in that space," Mr. Crowley said.

Rather than picking one outsourcer for all functions, a number of companies are opting to partner with various service providers, depending on factors such as "the experience of the provider, quality of the technology and the history of high-quality service," said Rick Hubbard, practice director for technology and administration solutions for Watson Wyatt Worldwide in Cleveland.

For example, vendors "that have very strong 401(k) administration may not have all the experience in the defined benefit and pensions arena," Mr. Hubbard said.

"Focusing on specialty service tends to be more of how we are utilizing outsourcing," said Paul Hackleman, benefits manager for San Mateo County, Calif.

Mr. Hackleman said he "tends not to use general service organizations" and prefers to work with several different human resources and employee benefits vendors that have "administrative skill sets that complement what we do internally."

San Mateo County currently uses separate outside vendors to administer flexible savings accounts and COBRA coverage; next year, it plans to outsource administration of retirement savings accounts and its dependent care assistance plan. "We don't outsource major things like eligibility or communication responsibilities; those we retain," Mr. Hackleman noted.

Commonly outsourced functions are administration of 401(k), 403(b) and 457 plans; FSAs; and COBRA and health insurance portability accounts (see chart).

"We don't want to have all of our eggs in one basket; that could be risky if the company should fail," said Mike Pikelny, corporate actuary and employee benefit consultant at Hartmarx Corp. in Chicago, which outsources medical claims processing and 401(k) plan administration for its 4,100 employees through separate vendors.

Additionally, "we'd be relying on that one company to be fair, which means they are their own scorekeeper," said Mr. Pikelny. "Because we are a relatively large employer, we like to establish relationships with as many providers as possible."

Despite the draw toward using vendors with specialized experience, the best-in-class model of benefits outsourcing is not without its challenges, experts note.

"As an employer, you have to weigh the pluses and minuses of getting specialty servicesÖand really need to do careful assessments and due diligence," the NBGH's Ms. Darling said.

In terms of vendor management, "it is generally very hard to deal with multiple vendors" compared with "more of a general contractor model, where the specialties are within one organization," Ms. Darling said.

A piecemeal strategy to outsourcing employee benefits also could lead to spikes in cost of service, Ms. Darling added.

At many large companies--particularly those with 40,000 employees and up--there remains a push to simplify things from a vendor management perspective, said Mary Tinebra, head of sales for Mercer HR Services in the Americas, who is based in New York.

"A lot of the organizations in the large-space market are exploring the benefits in bundling services" for benefits outsourcing, Ms. Tinebra said.

"It's a mature market, so there are a lot of solutions available to people," said Diane Youden, senior manager in the human resources division of New York-based PricewaterhouseCoopers L.L.P.

"Cost is always part of the discussions and everybody is still cost-conscious, but I also think that the buyersÖare a little more sophisticated," Ms. Youden said.

"In general, people need to be prepared to outsource--meaning that they work collaboratively with a partner and understand the expectations on both sides," said Mercer's Ms. Tinebra. "It can be an impediment to success if people don't go in understanding that it's a team effort."

"I think companies will continue to outsource, but some companies that have outsourced will actually bring parts back in house," said Watson Wyatt's Mr. Hubbard.

"People will continue to focus on what is the right combination of outsourcing for our company, rather than assuming that there is one model of outsourcing that fits all companies," Mr. Hubbard said.