Virtual HR and "The New Bundle"
By Matthew D. Hutcheson, an independent fiduciary and a nationally recognized authority on qualified plans and fiduciary responsibility. He is a Certified Pension Consultant and an Accredited Investment Fiduciary Auditor™. He may be contacted at matt@erisa-fiduciary.com.
The development of Retirement Plan administration methods over the last decade has been impressive, if not astounding in some cases. For example, in 1990, very few Plan Sponsors knew what a bundled 401k plan was, but that changed quickly. Initially, Mutual Fund companies, Banks and Insurance Companies developed and began selling bundled plans rigorously as the cutting edge solution. This was due to their ability to value their investment products each day and perform governmental compliance and reporting as one complete service. At that time, the catalysts driving the development of bundled plans were one-stop-shopping, and simplification through combining previously fragmented services to simplify the lives of managers and executives. Also, the bundling of these services enhanced the ability to quickly communicate account values, process distributions and deliver other information to participants.
Today, Human Resource professionals, Third Party Administrators, and other record-keepers realize that there are still functional gaps in the traditional bundled plan, just as there are in balanced forward plans. For Retirement Plan Consultants and Administrators, these gaps must be bridged to stay competitive and profitable. For Human Resource executives and managers, these gaps must be bridged to prevent becoming further buried in endless paperwork and frustration.
Identifying the Gaps
The Five Functional Gaps in 401k operation are:
- Lack of simple, efficient, and accurate way to gather payroll and census data.
Retirement Plan Record-keepers and Human Resource executives alike are familiar with the annual census request ritual. The Record-keeper sends a census request to their client at the end of each Plan year. Then, Human Resources spends a significant amount of time gathering or downloading data, possibly formatting files and searching for incomplete or erroneous social security numbers, dates or other pertinent data. This can be a laborious, and often frustrating process for all parties involved.
- Lack of time-efficient communications between client and record-keeper.
When a Record-keeper needs information from a client, how is it obtained? How about when a client needs information from the Record-keeper? A phone conversation can be inconvenient and inefficient. Faxes and Email work well, but someone still has to initiate a question, and then wait for an answer that may come days later.
- Lack of automated trading links between record-keeper and fund custodian.
"Record-keeping only" service providers may have relationships with dozens of different investment professionals. These relationships can be a valuable source of referrals and new business. However, these arrangements usually require the record-keeper to accommodate the Investment Company’s way of doing business. This may mean waiting for the Mutual Fund Company, or brokerage house to send trade confirmations in the mail. This may also mean settling each trade for each client separately. Even firms that offer investment advisory services as part of the Daily Valuation service, and have full electronic trading capabilities struggle with globalizing and automating trade settlements. Much of this may be attributed to their inability to gain access to accurate data on a consistent basis so that processing trades can be an anticipated and even scheduled event instead of it being reactive.
- Lack of a system that can deliver customized plan and educational data to participants in real time.
Most investment educational information is generic because managing this information (including Summary Plan Descriptions, forms and other client specific documents) can be burdensome, if not impossible, for a small practice with a limited enrollment and educational budget. Firms that have a sizable budget may have so many clients that any significant customization of materials would require ongoing heroics and efforts to keep up on both internal and external changes.
- Lack of coordination with other HR functions and benefit plans.
Other pre-tax deferrals, such as 125 deferrals, can easily be overlooked if the client fails to communicate, or the record-keeper fails to ask about their existence. Also, both Human Resource managers and participants alike usually have to search for information about different benefits in different places. The lack of coordination and communication of all types of benefits to Human Resources and Participants diminishes their perceived value. Without understanding the interplay between all of the benefits, Participants lose the ability to leverage their value as a whole.
Until now, the primary obstacle to simultaneously bridging these gaps was technology and understanding how to use it.
Enter the Internet, data warehousing, electronic time cards, HTML document compiling engines, a relational central Nervous system that ties all functions together and a host of other powerful electronic tools that expand the administration of Human Resource and employee benefit functions. The resulting service is the New Bundle.
The natural course of a free market consistently leads towards increasing efficiency through innovation and competition. As competition among retirement plan providers increases, a race has begun to become more efficient and to aggregate operation of benefits, payroll, Human Resources and online communications. Two materially different strategies have burst onto the scene, the first being offered by traditional payroll providers and the second being offered by Human Resource consulting firms. Both satisfy an immediate need in the marketplace, but in their own unique way.
The first strategy, through the normal evolution of business, bridges the five gaps by leveraging current client relationships. Since they are already in possession of payroll and current census data, it seemed natural transition from payroll services, to 401k and 125 administration services and then finally, to a full HR service.
The second strategy is offered through HR consulting firms. These consultants could really be classified as Information Technology (IT) firms. They are experts in Internet, programming, operations, HR and benefits, all wrapped up in one. These firms have bridged the gaps by creating a way for independent record-keepers and other service providers to better serve their clients and greatly enhance their efficiency and profitability by using them.
The primary difference between the two strategies is the role of third party record-keepers. In the first, the payroll service provider performs all related services internally so there is very little if any third party involvement. In the second, all related services are provided by the client’s current providers, but in an enhanced, efficient, cohesive way.
The underlying concept and foundation for the second strategy is to populate a relational data warehouse with all Human Resource data, from all sources, for automatic third party retrieval. The remainder of this article will focus on the coming wave of this technology.
The Coming Technological Wave
Just imagine this: On any given date, a record-keeper logs on to an Internet Portal by entering a confidential "key" code. Upon portal entry, the record-keeper is enabled to download specific client information at the click of a button. The downloaded information is queried from a "data warehouse". The data warehouse is populated with critical payroll, census, benefits and other company data each pay period. The record-keeper points and clicks on the wanted items, downloads them into a database, spreadsheet or an ASCII file and off they go. No more data file scrubbing or manipulation. No more receiving census or payroll data via fax or mail. The data is front-end audited, so the record-keeper can have 100% confidence the data is completely accurate, saving significant time. All of this is done electronically, and data becomes available to a record-keeper at the exact same time it is processed, hence the elimination of the year end census request ritual.
Front-end filters are a very valuable service, most efficiently used through an electronic time card system and online enrollments. Clean data originates when an employee fills out employment and benefit forms online, which can then be stored in sophisticated document imaging systems for immediate and future use. On an ongoing basis, data is entered in the electronic time card by employees, which is then transferred directly to a payroll calculation engine, which in turn calculates taxes, withholding etc. This data is then sent to the warehouse for storage and query. With the Warehouse populated, virtually any payroll processing company, client, accountant etc. could easily import the clean data for processing of payroll, check generation and submission of taxes. Insurance premiums, 401k deferrals, 125 deferrals and other expenses or liabilities can easily be tracked and electronically transmitted directly to their appropriate destination. The data can also be extracted from the data warehouse and then imported into sophisticated document compiling engines that automatically create web pages for participants to view, print or download plan specific data or items. Items accessible through the resulting web page might include Summary Plan Descriptions, downloadable forms and materials, company policies, employee handbooks, investment educational materials, historical paycheck stubs, unreimbursed cafeteria deferral balances, individual 401k account access and more.
Accessing data in this way empowers a record-keeper to be able to quickly process deferrals and associated employer contributions. It keeps inquiries to Human Resource executives to a minimum. It pacifies employees and gives them all of the information they ever need on their specific plan at their fingertips. It helps record-keepers stay ahead of the game by allowing them to get all their client’s payroll data the same day it is processed, in an import ready format. Think of the efficiency! Think of the ease! This is reality now!
Summary
Human Resource executives are buried in paper and have been forced to spend too much time on peripheral issues due to ever increasing complexities, and they are pressured to deliver more and more information to internal and external users. Record-keepers and other third party service providers have not been able to operate at optimum efficiency because the technologies and methodologies that enable a comprehensive Virtual HR service which bridges all of the gaps associated with benefit and HR administration did not exist. By harnessing the power of the Internet, data warehousing and other sophisticated software and techniques, companies and record-keepers and other service providers alike can greatly simplify their lives, increase productivity and profitability, decrease errors and omissions and eliminate many of the frustrations of HR and Benefit administration, all from one central data source. This is the New Bundle.
Need More Information?
Matt would be glad to discuss this issue with you further. You may email him at matt@erisa-fiduiary.com.
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