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The Real Cost Of Benefits

Sunday, October 16, 2011
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In HR, it always seems to be a time of "doing more with less," and the prospect of a double-dip recession or even depression makes that axiom all the more true. Constant cost pressure on staffing and technology, accompanied by equally constant benefit-cost increases, requires HR executives to have a firm understanding of the true cost of benefits administration.

That's not an easy task. Healthcare reform may require that companies put that cost on W-2s, so now is the right time to take a careful and detailed look at these costs -- and not just in healthcare.

A common approach is for the HR executive to take the direct labor costs of the internal benefits staff and add to them the costs of any outside record-keepers or administrators being used to deliver the benefits.

While that process may capture about 60 percent of the benefit-administration costs in an average company, the result will be nowhere close to the full number.

We often see HR executives and chief operating officers ask for benchmark benefit-delivery costs. There are a wide number of sources for average and median costs for healthcare, retirement systems, life insurance and other major benefits. Those benchmarks focus on the benefit delivered, such as $3,241 in health claims paid for families in 2009.

But the benchmarks for plan administration are much less numerous, and companies often do a terrible job of capturing full costs when comparing themselves to benchmarks in the administrative area.

Substantial plan-administration costs are often buried in the budgets and costs of other departments in the company. The legal department may have attorneys partially dedicated to ERISA and employment law. The IT department will have programmers and other professionals working to maintain plan feeds or extracts, and applications costs may be buried in the IT budget and not allocated back to HR.

Treasury will often have a role in plan investments, funding and trust administration.

Risk management and insurance may have costs directly or partially attributable to benefits administration, and many claims for employment liability result from incorrect handling of employee benefits.

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To get a fully detailed and careful number for benefits administration, it is necessary to assimilate all of these internal costs and then add those costs to the costs of all the service providers touching benefits administration.

Often, there are 15 or more providers helping administer parts of the benefits, and it is necessary to capture all the ongoing service costs plus any transition or implementation fees charged in the last three years to get an accurate picture of the true costs of benefit delivery.

Instead of beating themselves up over the benchmark, HR executives deserve to know whether they are comparing apples to apples. HR should understand the true cost of benefits delivery, and there is a legislative imperative that will force us to do so -- hopefully, well in advance of the date required by legislation.

Lowell Williams is a director in KPMG's Shared Services and Outsourcing Advisory group, based in New York. He can be reached at lcwilliams@KPMG.com.

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