Outsourcing Beneftis Administration | Health Care Reform

ADP Research Institute®

Insourcing vs. Outsourcing Benefits Administration: What’s the Best Approach for your Organization?



Should your organization outsource benefits administration or handle these functions using internal HR staff? Making an informed decision requires a comprehensive knowledge of the supplier market and a detailed understanding of the advantages and disadvantages of each approach. In light of the technological and legal changes that have increased employee benefits administration complexity, including the Patient Protection and Affordable Care Act (PPACA or Health Care Reform), the ADP Research Institute, a specialized group within ADP, conducted a survey to find out what employers in midsized (50-999 employees) and large (1000+ employees) companies are thinking, doing and planning when it comes to handling key benefits administration tasks. This paper discusses the survey findings and provides insights to help you make the right decisions about insourcing versus outsourcing.  You’ll learn how factors such as cost and compliance influence employers’ decisions and which criteria to use when selecting an employee benefits administration vendor.

Health Care Reform Drives Employers to Outsource Employee Benefits Administration Functions

Out of nine key benefits administration tasks, employers in midsized and large companies are most likely to handle six completely or partially in-house. Large employers are more likely to outsource than midsized employers, but both are most likely to outsource complex functions with significant compliance requirements, including COBRA, Flexible Spending Account (FSA), and 401(k) administration. Many employers surveyed indicate that Health Care Reform and its associated compliance complexity are leading them to outsource more administrative functions. In fact, roughly half of employers (52 percent of midsized and 54 percent of large) believe that Health Care Reform will increase the complexity of employee benefits administration. An even higher percent of employers believe that Health Care Reform will increase the time spent on benefits administration.

Increasing HR Compliance Complexity Makes Integration More Critical

When outsourcing benefits administration, large employers use more providers than mid-sized employers. Forty-four percent of large employers surveyed use three or more outsourcing providers compared to only 32 percent of midsized employers. However, use of multiple benefits service vendors is likely to become more problematic as new compliance mandates drive the need for integration across benefit functions.

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Discover the Reasons Behind Employers’ Insourcing and Outsourcing Decisions

Midsized and large companies have different reasons for choosing to handle employee benefits administration in-house. HR managers in midsized companies report that they are most likely to insource because it improves their ability to stay in touch with employees and makes it easier to administer benefits, make changes, and fix errors. On the other hand, HR managers in large companies are most likely to insource benefits administration because they want to maintain control over the process.

For employers of all sizes, helping to ensure compliance is the most common driver of outsourcing. In order to help avoid lawsuits, fines, and penalties, they need access to specialized expertise that has become more expensive and burdensome to maintain within their internal HR organizations. The vast majority of HR managers in both midsized and large companies indicate that outsourcing at least some benefits administration functions adds real value by supporting regulatory compliance, providing access to expertise, and reducing the administrative burden on internal HR resources.

Employers May Change Benefits Administration Providers

Despite reporting high satisfaction with their current outsourcing provider(s), 31 percent of HR managers in midsized and 47 percent of those in large companies say they are at least somewhat likely to switch vendors within the next 24 months. In addition, 28 percent of HR managers in midsized companies and 42 percent in large companies are planning to outsource more tasks within this same period. This move to expand employee benefits administration outsourcing is driven in part by Health Care Reform and its compliance and administrative demands.  

What to Look For in an Employee Benefits Administration Partner

The majority of both midsized (86 percent) and large (82 percent) employers rely on external advisors when choosing a third-party provider. Midsized employers are far more likely to rely on the advice of their broker, while large employers are more likely to turn to a fee-for-service consultant. For both midsized and large employers, cost of services and benefit-related expertise are the two top-ranked criteria for selecting potential outsourcing partners. This paper provides valuable tips for evaluating the HR compliance capabilities of prospective partners.

*A complete list of sources and citations can be found in the full report.

About This Report: Report data and conclusions are based on a 2011 HR/Benefits Pulse Survey conducted by the ADP Research Institute, a specialized group within ADP that provides insights for leaders in both the private and public sectors around issues of human capital management, employment trends and workforce strategy. See full report for details on research methodology.

Keywords: Benefits Administration, Compliance, Health Care Reform, HR Management

Business Types: Research for Midsized Organizations, Research for Large Organizations

Roles: Research for Human Resources Professionals

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