If you've been following the headlines over the past few years, you've seen some big changes in the benefits administration world. For example, Aon recently announced that it is selling its long-standing benefits and human resources (HR) administration business to Blackstone. In January, Xerox completed the spin-off of Conduent, which provides benefits consulting and administration services. Back in 2015, TransAmerica acquired Mercer's U.S. defined contribution recordkeeping business.

Gartner Inc. research reveals that 80% of companies now outsource at least one HR activity. The trend toward benefits administration outsourcing continues to accelerate, with roughly three in four companies now outsourcing at least some benefits administration activities--up 12% from two-thirds in 2014. So how have these changes to the benefits delivery marketplace affected benefits strategies and buying decisions?

Here are four trends we've seen based on recent work with our clients.

1. Best-in-class purchasing
There's a move toward best-in-class selection of outsourcing providers. In other words, employers are selecting providers by benefit "tower"--health and welfare, defined contribution, defined benefit--rather than consolidating delivery to one total benefits outsourcing (TBO) provider. Our observations are backed by a recent study, which revealed that 64% of employers surveyed use more than one benefits administration provider. Additionally, 35% of large employers, with 1,000 lives or more, indicated an increase in the number of providers they use to five.

There are a number of explanations to support this trend:
- Flux in the marketplace
- Inconsistent service quality across benefits towers
- Fewer providers who can deliver TBO

What this means to plan sponsors: Clients who bought a TBO/single-provider approach and like the integration have far fewer options to consider should they decide to go to market. They will need to expand their thinking to include the best-in-class approach and look for integration among providers--which can be accomplished with good leadership and vendor management from the client.

2. Provider disruption
The benefits administration marketplace has been, and continues to be, dynamic. In the 20+ years I have been in the market, there has scarcely been a year when some major provider change has not occurred. Providers have consolidated through acquisition and merger. Some have exited one or more towers of delivery. Others have spun off their administration units to stockholders as independent companies. The disruptive nature of the provider base has not led to market contraction. However, as affected client companies continue to outsource their administration it has led to movement by clients and opened the door for new providers.

What this means to plan sponsors: In this environment, a plan sponsor must be cognizant of its role as fiduciary to the plan. This means doing due diligence, soliciting proposals from alternative providers, and reviewing service levels with the current provider--especially as providers work their way through the changes.

3. Changes to bundled consulting and administration
Interestingly, providers are initiating very different strategies regarding the bundling of consulting and administration. Of the four largest administration providers in the large company market segment, two (Mercer and Willis Towers Watson) have tightened the link and two (Aon and Conduent) are breaking the link between consulting and administration. The exception is when a client chooses a private exchange model. In this case, the provider wants to keep consulting and administration tightly within its service offering.

Clients are split regarding the efficacy of bundling. Based on our work in this area and our observations of client choices, about as many believe that integration is important to effective plan management as believe in keeping them separate.

What this means to plan sponsors: Plan sponsors need to be aware of what products and services their consultants provide, such as benefits administration, private health exchanges, prescription collaboratives, etc. There may be corporate initiatives requiring consultants to present these products to you. That's why it's important to get independent insights into your decision-making process to ensure which strategy will work best for your organization.

4. Health and welfare outsourcing growth
The majority of retirement plans, both defined contribution and defined benefit plans, are outsourced today. Though health and welfare (H&W) benefits administration has lagged behind, over the past several years it has grown by 7% to 10% annually. Approximately 52% are outsourcing H&W administration, while 45% are administering in-house or using limited outsourcing services (flexible spending accounts, COBRA, Patient Protection and Affordable Care Act [ACA] reporting).

Rationale for administering in-house:

- Contact: Health plan administration involves many calls. Some plan sponsors believe that employees want to talk to company employees versus a call center.
- Cost: Some plan sponsors believe it is more costly to outsource than to manage their plans in-house or at least that they will have a difficult time developing the cost/benefit analyses to move to outsourcing.
- Complexity: The plan design is very unique and/or complicated so the plan sponsor believes it needs to be administered in-house.

Reasons employers move to outsourcing:
- ACA compliance requirements
- Expanded benefit options for employees
- Lack of internal technology capability and expense of upgrades
- Overburdened staff or loss/reduction of staff
- Leverage of outsourced providers for administrative cost savings

What this means for plan sponsors: With the changing benefits marketplace, employers need to offer competitive benefits--with options for changing demographics. They also need to improve web-based employee access and still contain cost. The market is growing and changing quickly but your Milliman consultant can help you understand the current market, guide you through expected future changes and find a partner to serve you well over the coming years.