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Making the Most of the Latest Benefits Outsourcing

HR departments struggle to maintain competitive workplace retirement plans for their employees while balancing the increased costs of providing them. Rising administrative burdens and litigation threats have kept HR leaders from focusing more on strategic initiatives to move the organization forward in uncertain times.

Benefits outsourcing has often been used to solve this challenge, especially among smaller employers that don't have the economies of scale or negotiating power to contain costs and risks as efficiently as larger rivals. However, the loss of quality control, hidden fees, and vendor management issues have become barriers to broader expansion among organizations.

New regulations and options – many of which go into effect next year – may radically alter the competitive landscape for outsourcing. Organizations that have considered outsourcing will need to take a second look and reassess the possibilities.

Successful organizations will need a data-driven approach to achieve their overall workforce goals. Here is what they should examine as they refine their outsourcing strategy.


Create a Benefits Strategy That Reduces Fiduciary Risks

The SECURE Act, which passed in 2019, makes it possible for organizations to move their 401(k) plans to a pooled employer plan (PEP) run by a named fiduciary third-party expert, pooled plan provider (PPP) starting next year. This switch can mitigate many of the current risks fiduciaries may face for not acting in plan participants' best interest.

Retirement plan sponsors have faced increased risks over litigation involving excessive fees. Proposed class actions challenging 401(k) plan fees are expected to increase fivefold in 2020.[1] Under a PEP, the fiduciary responsibilities of choosing an auditor, recordkeeper, and investment options – as well as all of the administrative and compliance obligations – fall on the PPP, not the employer. Employers can shift fiduciary responsibility to the pooled plan provider. A pooled plan provider monitors operational compliance across all functions and parties. This level of risk mitigation is not available for employers who have a traditional single account plan structure.

PEPs will become available Jan. 1, 2021, and employers will need to carefully evaluate pooled plan providers to determine whether they have the expertise and scale to protect against fiduciary risks. Plan sponsors will need a process to go to the marketplace and select a provider. Employers should understand their retirement plan's history and overall workforce goals to choose the best provider for their employees.


Simplify Retirement Plan Administration

Using better technology to administer benefits, a pooled plan provider can streamline benefits administration and lower costs. The cost savings from a PEP has witnessed average savings of approximately 40%.[2]

Pooled employer plans can better operationalize the complexity and the administrative burden of providing retirement benefits. Pooled plan providers can leverage scale to review all possible plans, compliance, and investment manager options and assess the best opportunities for cost savings, including potential investment management fees. With a structured plan administration through a PEP, HR departments can free up time to devote to more pressing strategic initiatives while reducing the risks of providing retirement benefits.

Organizations that want to explore adopting a pooled employer plan will need to understand the nuances of their retirement benefits before selecting a provider. A fee benchmarking study can help plan sponsors in their search for pooled plan providers and reduce fiduciary risk even if they don't choose the PEP.


Give Plan Participants Opportunities for Better Outcomes

A decade ago, plan sponsors often benchmarked the success of their retirement plans by participation rates. Then, they targeted contribution levels, which turned into looking at income adequacy. Now leading plan sponsors are concerned about overall financial wellness. A PEP can help organizations adapt to the ever-changing retirement landscape.

Participants will need better tools and resources to educate themselves about their financial options. PEPs have the incentives to continue to enhance participant experiences, given their scale and specialization. Lifetime income options, automatic features, and lower cost investment choices can improve retirement readiness among employees, which PEPs will offer to increase the competition in the marketplace.

Ultimately, organizations can focus on their core businesses and redirect resources that have been dedicated to providing retirement benefits under a pooled employer plan. Even though the pooled plan provider will run the PEP, employers will still control and need to manage their employee payroll data, including information about hirings, separations, and retirements. However, the added administrative burden will likely be much smaller than the status quo most organizations face now.

Retirement plans will continue to evolve. Employers who seize on the PEP's outsourcing innovations will have more resources to grow and thrive in the future. Aon can help organizations evaluate their retirement options to make the most out of outsourcing opportunities.

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[1] “401(k) Fee Suits Flood Courts, Set for Fivefold Jump in 2020,” Bloomberg Law

[2] Aon analysis of PEP costs. There is no guarantee that these results or savings will be achieved.