Outsourcing is already common for corporate behemoths, and it is the norm for 401(k) and other defined contribution (DC) plans of all sizes, as well as COBRA and flexible spending account (FSA) plans. Most smaller organizations have chosen to maintain in-house administration for their defined benefit (DB) plans. Until now.

In the past, when companies looked at outsourcing, they experienced sticker shock and ultimately retained their internal structures. Or they worried about preserving the culture in dealing with employees, or about trusting an outside vendor to do this important administration accurately.

However, now is a good time to take another look. Outsourcing costs have become increasingly competitive while plan complexity and rising service expectations have increased the demands being placed on internal administration teams. These trends, along with risks and limited flexibility that come with internal administration, may tilt the balance in favor of further outsourcing. Employers should take a closer look.


As the outsourcing market matures, many factors are shifting the balance of the cost/benefit comparison for plan sponsors.

First, outsourcing fee rates are nearly equal to those quoted several years ago, and may even be lower. Several issues are influencing this:

• Maturing industry
  Benefits outsourcing has matured as an industry. Processes have become more efficient over time, and systems development costs have stabilized. With many of these fixed costs behind them, outsourcing firms hungry for new business are quoting competitive prices in an effort to gain market share.


• Increased competition
  The maturing industry has also brought more clarity to the list of viable vendors. The firms in the outsourcing space are more likely today to be committed to this business long-term. A few years ago, many vendors were experimenting with forays into outsourcing that were not ultimately sustainable. The remaining players are looking to grow and improve their services. There is clear competition to gain new clients.

On the other side of the cost analysis, the demands upon internal administration teams are growing. It is increasingly difficult to maintain internal administration units at the same cost level, which is due to factors such as:

• Internal administrative staff
  The increasing complexity of the benefits administration landscape simply requires more knowledge and more work from internal staff. This makes it difficult to maintain consistent staffing levels, in terms of both numbers and pay. More complexity also leads to more employee questions, and this puts additional pressure on internal call centers or administration support groups.


• IT expenses
  Systems requirements are increasing for effective administration. Plan changes, compliance requirements, and security requirements are one source of change. The other source is the desire for online tools and other enhancements intended to service the employees. Both sources result in administration system enhancement requests that require more IT expertise and increased capital needs.

The analysis of outsourcing vs. in-house benefits administration is evolving. For many mid-sized organizations, a prior analysis of outsourcing for pension administration showed higher costs, and little compelling reason to move. However, the cost dynamics have shifted in favor of outsourcing, and hidden costs associated with the risks of in-house administration provide even more support for outsourcing.

If any of the following apply to your organization, you may wish to reconsider the outsourcing decision:

• Your staff is limited, so they struggle to keep up during annual enrollment, or when other new changes are implemented


• One or two people on your team hold much of the historical knowledge


• The system (or worksheet) you currently use is out of date and difficult to modify


• It's difficult to get support from your IT department


• Your records are not centralized some in paper files, some on other databases


• You struggle to keep administration consistent with the most recent law changes


• Calculation or administration errors have led to costly legal settlements


• You wish employees had online tools so they could model their own pension estimates instead of calling you


• You can t get your daily work done because of participant calls