Outsourcing various aspects of employee benefits administration has become an increasingly common practice among American companies looking to reduce costs and administrative burdens. The decision to outsource benefits though is a complex one that requires careful consideration of many factors.

Understanding the Benefits and Risks of Outsourcing

The potential benefits of outsourcing employee benefits administration are clear. The people at VertiSource HR explain that using an outside vendor can reduce overall costs, since third-party administrators can leverage economies of scale. It also allows companies to access specialized expertise and technology that may not be feasible to develop in-house. Outsourcing routine administrative tasks can free up internal HR resources to focus on more strategic initiatives.

However, there are also risks that must be evaluated. Outsourcing core HR functions, like benefits, places a significant reliance on an outside vendor. Companies need to be confident that the vendor will provide excellent ongoing service, accurate transactions processing, and proper protection of sensitive employee data. There is also a risk of declining service levels over time after the contract is signed. And insourcing these functions back in-house once they have been outsourced can be difficult and costly.

Selecting the Right Vendor

Choosing the right benefits administration partner is arguably the most critical decision in outsourcing benefits. Key factors to evaluate include service capability, technology platform, data protection, cost structure, implementation approach and account management.

Taking the time to thoroughly evaluate multiple vendors across these criteria is essential to finding the right outsourcing partner. Checking vendor references can provide invaluable insight as well.

Structuring an Effective Outsourcing Agreement

The outsourcing contract establishes the legal parameters and requirements for the engagement, so structuring an effective agreement is critical before any transition occurs. Key considerations include service levels, performance metrics, pricing, data protection, indemnity, and termination.

Involving legal counsel in contract negotiations is highly recommended to ensure protections are in place.

Managing the Implementation Process

The implementation process for transitioning benefits administration to an outsourcing vendor requires careful coordination. A detailed project plan should guide the process. Critical implementation steps include:

  • Data transfer – Work closely with the vendor on proper transfer of all plan, employee, and historical benefits data from current systems. Validate accuracy.
  • Testing – Conduct thorough end-to-end testing of key interfaces, transactions, validations, and reporting before go-live. Identify platform bugs.
  • Integration – Evaluate any needed links between the vendor platform and internal payroll, HRIS, and other systems. Enable real-time data flows.
  • Employee transition – Develop and execute a change management plan for transitioning employees to the new platform while minimizing confusion. Provide training.
  • Go-live – Cutover the system in a phased approach if possible. Closely monitor transactions and address issues immediately post go-live. Manage any parallel runs with legacy systems.

Having dedicated internal project managers to coordinate with vendor implementation teams can help streamline this complex and risky transition process.

Ongoing Governance and Vendor Management

Once outsourcing is implemented, ongoing governance mechanisms must be established to manage these critical vendor relationships. Best practices include performance reviews, issue escalation, contract updates, technology oversight and relationship management.

Proactively managing the outsourcing relationship means companies can gain maximum strategic value from outsourcing benefits while minimizing associated risks.


Outsourcing employee benefits administration can yield significant rewards through cost reduction, technology access, and HR efficiencies. But the complexities involved mean companies must thoroughly assess risks, choose the right vendor, structure a strong contract, execute a careful implementation, and maintain rigorous oversight of outsourcing partners. With a strategic approach, the outsourcing option can greatly benefit companies seeking to optimize their employee benefits programs and enhance HR service delivery.

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