Outsourcing 401(k) Administration Yields Benefits
Benefits administrators at American Express had a vision. Their dream: to develop a de-fined contribution plan ad-ministration in which participants could make one call, talk to one person, and have their requests handled in one day.
Today, that vision of one call, one person, one day is a reality at the New York City-based company. Last year, American Express became one of the first major U.S. corporations to outsource its defined-contribution plan administration by forming an alliance with a technologically advanced service provider.
By fully outsourcing them, all aspects of the program, from enrollment to final distribution, are managed by the service provider. The employer sets the parameters for response time, statements, loans and withdrawals. The plan sponsor and service provider jointly design systems to implement the plan. Exception decisions remain with the plan sponsor.
The service provider creates a group of direct system interfaces among the plan sponsor, the plan sponsor’s computer systems, participants, account administrators, telephone representatives and the servicer’s computer systems.
Participants communicate directly with the service provider via a toll-free number. Specially trained telephone representatives process all requests for:
- Enrollment information and enrollment services
- Asset allocation changes
- Contribution level changes
- Loans or withdrawals
- Information about participants’ accounts and the plan.
Asset allocation and contribution changes are handled immediately, without paperwork. If there’s a withdrawal request, however, the service provider completes the proper paperwork and mails or faxes it to the employee for review and a signature. The request is processed as soon as the service provider receives the signed forms.
Full outsourcing is most appropriate for companies having at least 10,000 employees, although companies having 1,000 employees or more can benefit from many of the individual features as well. (Building the link that feeds the plan sponsor’s payroll may prove difficult for smaller companies.)
It’s certainly an idea whose time has come. Employees, as consumers, already have been receiving single-source services from banks, mutual fund providers and insurance companies. However, when it comes to the largest assets they possess—their retirement plan contributions—they’re stuck with antiquated systems technology.
The old system was ineffective and inefficient.
The American Express switch to outsourcing was driven by increasing needs for flexibility, efficiency and information. The system the company was using was both ineffective and inefficient: It also was expensive, accumulating a high cost for records maintenance and administration. The elements American Express wanted to improve included:
- Its database—an online, real-time payroll interface with American Express’ various payroll systems would create a new, consolidated, employee data base.
- Its cost—paying administrators to communicate with employees was more costly than outsourcing.
- Information accuracy and consistency—internal benefits staff scattered throughout the country couldn’t compete with a group of phone representatives at specially equipped work stations, who received updates each night.
- Response time—it had been taking at least six weeks to process loan requests.
- Employee access —outsourcing to a service provider that would balance the fund nightly would allow workers to make changes at times other than the plan’s normal month-end reconciliation. In addition, American Express wanted to have a benefits administrator who could speak Spanish.
To develop a system that would live up to the high standards of its vision, American Express teamed up with its subsidiary, IDS Trust in Minneapolis. The project involved the management of a voluminous amount of information, and coordination with the company’s offices throughout the country. Strong project managers on both sides helped smooth the process, which took 18 months to complete.
Making the change was a six-step process.
The process was implemented in steps, including:
- Setting parameters.
- Determining rules and procedures.
- Using new technology.
- Making the conversion.
Keeping in mind American Express’ vision of the ideal defined-contribution plan administration, IDS Trust researched what could be outsourced legally. To satisfy plan administrator requirements that it retain decision-making authority in certain cases—such as hardship withdrawal requests, which represent an immediate and heavy financial need that can’t be satisfied through other sources—American Express developed specific guidelines the service provider could use to review requests.
American Express also selected investment alternatives and their requirements for investing in company stock, to allow it to monitor stock trading. To assist, the service provider arranged to flag certain transactions.
Setting parameters took approximately seven months and was followed by two months of project planning. The next several phases—determining rules and procedures, programming, testing and conversion—largely overlapped. Together, these phases took about nine months to complete.
IDS Trust studied American Express’ current administration activity and developed flow charts for every activity to be outsourced, such as enrollments, loans and withdrawals. It followed the basic processes of American Express’ previous system, but made use of current technology to boost turnaround time and increase the consistency of all transactions. All American Express had to do was to check and approve the flow charts.
The service provider then prepared the forms for telephone representatives to complete, as well as the paperwork required for employees to preauthorize telephone transactions. The legal department at American Express reviewed the new forms, contracts, amendments to the plan and the guidelines for making decisions about requests.
For the employee, the technology means increased service and responsiveness. It allows a toll-free operator to view several plan documents on a computer screen simultaneously. This provides the operator with immediate access to complete information about a participant’s account, the plan’s investment options, and the American Express decision-making guidelines. As a result, in most cases, operators can provide information or make account changes on the spot.
From a service-provider perspective, image-processing technology eliminates paperwork and manages the work flow with greater speed and efficiency. This technology alone increases the service provider’s productivity by nearly 20%.
For the service provider to make direct payroll adjustments to reflect contribution changes, a first-of-its-kind reverse interface had to be developed. Building online, real-time data linkages and high-volume networks was a major challenge, but not insurmountable. It required systems programming at both companies, which had different computer systems. The work was performed and managed largely by the service provider.
The remainder of the programming was much simpler and followed from the business procedures. The linkages between American Express and IDS Trust were the only changes in the company’s plan administration system.
This important phase took three months. IDS Trust tested the systems, system interfaces and data integrity. The objective was to ensure that the data feeds were right the first time, every time—consistent with its total-quality-management approach. Major improvements in the integrity of the data were required because the plan previously had been balanced only quarterly. To give participants access to information about their retirement accounts, the information had to be sufficiently accurate to balance at the end of each day.
The conversion process took three months and proved to be difficult. The project managers played an important role during this stage, coordinating the conversion steps with their respective companies and raising red flags at the first signs of problems. During this period, American Express began communicating to workers the new investment options, and then later, the details on how the plan would work. Finally, American Express moved the money, IDS Trust took over administration, the toll-free number was connected, and service began.
Outsourcing offers numerous advantages. By outsourcing, American Express:
- Gained a consolidated employee data base through its service provider
- Freed human resources staff to devote time to other tasks. Outsourcing plan administration saved thousands of hours in staff time
- Reduced 401(k) administration costs. American Express believes that the annual savings are significant. However, it’s inappropriate to evaluate outsourcing quantitatively without considering more important qualitative comparisons with in-house administration. Outsourcing plan administration has proven to be not only less expensive but also vastly better.
The benefits to the plan participants include:
- Increased attractiveness of the organization’s 401(k) plan to employees, because of better control, information and access
- More employee control of 401(k) contributions. The new system gives participants unlimited transaction ability, and, rather than waiting for the end of the month to change their allocations, employees who call before noon can make changes the same day. The process of obtaining a withdrawal also is simplified
- Consistent answers to questions, given by fewer people with better information
- Increasing access to information. Employees can call the toll-free number for immediate answers to virtually all questions
- More timely loans, distributions and statements. Loans and distributions, which previously had taken from six to 10 weeks to process, now take less than seven business days, and nearly 80% take two days or less. Statements arrive in 12 business days, instead of six weeks
- Access to Spanish-speaking operators. In a typical month, eight to 10 American Express employees request an operator who can speak Spanish.
Companies no longer can get away with using outdated, nonresponsive systems technology. Workers using ATMs and banking by phone have higher expectations. They shouldn’t have to tolerate months of delay. Outsourcing can improve the quality of the defined contribution plan and decrease the cost, especially for larger corporations. Like American Express, any company interested in outsourcing should start by envisioning what it wants. The next step is finding a service provider that’s willing to make the vision a reality.
Personnel Journal, November 1992, Vol. 71, No. 11, Pp. 98-102.