Why Is Benefits Administration So Expensive?

One of the biggest costs for a business is benefits administration, second only behind payroll. But why are employee benefits and benefits administration so expensive? As you might imagine, there’s not a single, concise answer for this question – but the more you understand about the nature of benefits administration in business, the more likely you’ll be to reduce your costs, operate more efficiently, and ultimately improve your business’s prospects for the future.

Reducing the Costs of Benefits Administration

First, let’s look at some of the ways you can reduce the cost of benefits administration.

You could simply cut benefits for your employees in some way. This is arguably the most straightforward and impactful way to cut costs. For example, you could eliminate some of your full-time and/or part-time employees and replace them with contractors, who don’t receive benefits, or you could simply reduce some of your company offers.

But of course, this could end up working against you; employee benefits play a significant role in maximizing employee retention, so if you start cutting benefits, you might end up losing staff members (and eventually losing even more money). Additionally, aggressively cutting benefits to save money could hurt your business’s reputation.

Another, more accessible option is to turn to benefits administration outsourcing. The idea here is simple; you’ll work with a third party to handle the majority of your business’s benefits administration needs, such as shopping around for the best plan, educating and training your own employees, and handling employee benefits questions with a customer service approach.

Outsourcing isn’t always the most financially or operationally effective strategy, but it can pay off for large businesses. Oftentimes, you’ll pay less for the services of a benefits administration outsourcing firm than you will for a team of full-time benefits administrations in-house.

Why Is Benefits Administration So Expensive?

Why is benefits administration so expensive in the first place?

  • Rising benefits premiums. The most impactful variable is probably rising benefits premiums. The cost of common benefits, like employee health insurance, is rising overall – and there are several factors influencing this. Healthcare costs are rising because of access to better technology, strict regulations preventing the emergence of competition, declining health in the United States, an aging population, doctor shortage, and dozens of other important variables. Inflation is also beginning to influence the economy at large, pushing the cost of nearly everything higher. Unfortunately, you don’t have much influence or autonomy in this area; you can shop around for better benefits packages to save some money on your employee plans, but if you’re locked into a contract, even this option may not be available to you.
  • HR manager salaries. If you want your benefits to be secured, managed, and overseen by properly educated and trained people, it’s not going to be cheap. Most HR managers and benefits administration professionals are relatively expensive; they often have advanced degrees and many years of experience, demanding a high salary in exchange. You can try to cut corners by hiring people less experienced, but this will work against you in several obvious ways. Instead, you’re typically better off outsourcing your needs, working with an entire team of experts for a monthly or annual fee.
  • Administration complexity. Benefits administration has the potential to be highly complex. Your employees’ insurance plans likely require hundreds of pages of explanation to fully understand. There are dozens, if not hundreds of benefits providers to choose from. Managing internal records and tracking costs can be a nightmare.

And on top of all that, you’ll need to be able to field questions and assist employees who have questions regarding their benefits packages. If you’re not prepared with a full team of dedicated experts and specialists, your entire benefits administration system could fall apart. It’s yet another reason why it’s so comparatively inexpensive to work with a benefits administration agency; they already have all those specialists and experts on staff to help serve your needs.

  • Compliance. The Employee Benefits Security Administration and the U.S. Department of Labor overall were created to protect employees – but they can also make benefits administration significantly more complex. Maintaining compliance and reviewing new laws and employer requirements can add more complexity and costs to an already complex and expensive set of responsibilities.

There are several reasons why benefits administration is so expensive, and most of them are outside of your control. You can’t exert your individual influence to lower the cost of health insurance, nor can you hire an educated and experienced HR manager for a trivial amount of money. Instead, you have to control the variables you can – and outsource your benefits administration needs to improve efficiency while saving money at the same time.

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