Should you get your 401(k) from your payroll provider?
If you are thinking about offering a 401(k), you may think it makes perfect sense to hire your payroll provider to recordkeep and administer the plan. After all, you want to sock away funds for tax deferred investing and you want the same for your employees. But you are also running a business. And if you are like most small business owners, thinking about complying with complex IRS rules, understanding fiduciary responsibilities, and evaluating investment options makes your head tired. If you can avoid a slew of administrative hassles by flipping a switch to turn on the “401(k)” option, why not flip it and move on?
Actually, we can think of a reason. Okay, we can think of at least five reasons why your payroll provider may not be the best option when it comes to offering a retirement plan for you and your employees.
Five reasons to think twice before paying your payroll provider to run your 401(k)
1) The convenience of sticking with your payroll provider may be overrated. Convenience and reduced paperwork is a big selling point for payroll providers. We all like to expand business relationships with those who are doing a good job us, especially if it saves us some headaches
But guess what? You don’t need to hire the same company to run payroll and your 401(k) to realize these efficiencies. At ForUsAll our cloud-based 401(k) technology links almost any cloud-based payroll system into the 401(k) recordkeeper. That means your recordkeeper’s, well, records, are updated when new employees become eligible, deferral rates are automatically updated, and new participants are alerted when they become eligible for the plan. Integrating payroll with 401(k) recordkeeping is vital to avoiding unnecessary manual data entry, but payroll providers aren’t the only ones with this capability. (ForUsAll is an independent advisor, and we’ll partner with you to find a responsible and affordable recordkeeper.)
2) You and your employees may end up paying more for your 401(k) plan despite the advertised savings from bundling these services. There are a lot of moving parts to a 401(k). In addition to recordkeeping, 401(k) tasks include designing the plan, ensuring that plan documents are properly followed, teaching employees how to join the plan, providing investment advice, taking on investment fiduciary liability, and ensuring all aspects of the plan remain in compliance. Different providers offer varying levels of service and have different fee structures. Before signing on with your payroll provider, you should be sure to understand how adding the 401(k) plan service impacts your payroll invoice. Some payroll providers do not charge a separate annual participant fee to their 401(k) clients, but instead wrap the added cost up into your payroll invoice. Make sure you understand how adding the 401(k) has impacted your payroll invoice. It is important to understand the total fees involved, paying particular attention to total expenses as a percentage of fund assets. These are the fees that cut directly into retirement savings.
Typically, the fees charged by the mutual fund investments in the plan account for the greatest share of this total expense ratio. While payroll providers may offer thousands of investment options, make sure that the funds you are considering don’t wind up costing you tens or even hundreds of thousands of dollars while enrolled in your own 401(k). That can happen because what may appear to be small differences in fund costs can add up to huge differences over the decades participants are invested.
At year-end 2015 the average expense ratio for an equity fund was 0.53% according to the Investment Company Institute. If you are considering a plan where most of the equity funds cost more than 0.53%, that is a flashing warning sign that you may need to look elsewhere for a retirement plan. Better yet, look for fund expense ratios in the range of 0.20% or less. With the proliferation of low cost index funds, 401(k) investments should not be taking a big bite out of your employees’ nest egg. ForUsAll’s preferred investment lineup costs only 0.13% – learn more about our 401(k) investment philosophy.
3) Your payroll company may be great at payroll. But it may not be great at helping employees save for retirement. There’s more to running a successful retirement plan than simple accounting. How easy is it for employees to join the plan, or change their contributions? Does your payroll provider offer automatic enrollment or automatic escalation – the ability to automatically increase employee contributions each and every year? Ask your payroll provider to provide you with the average participation rate in its plans. If the figure is below 90%, ask them how they will ensure that your employees get enrolled and stay enrolled.
At ForUsAll we have found that having a virtual advisor, DAVE, is great way to help employees understand their 401(k) investment options. DAVE walks employees through plan details and helps them customize their investment choices. DAVE can even show your employees how to change their contribution rate. DAVE is a key member of our team, as he is partly responsible for the high savings and contributions rates achieved in ForUsAll plans.
4) A lot of 401(k) administration has nothing to do with payroll. Retirement plans must comply with a number of complex IRS and ERISA rules. It requires both technical and technological expertise to ensure proper compliance without administrative headaches. For example, a 401(k) plan must undergo testing to ensure it is not primarily benefiting highly paid employees. When considering a provider, make sure those tests are performed regularly so that any problems can be addressed before year end. Also, make sure your provider completes, reviews and signs the IRS Form 5500. This may take a bit of investigating because some providers complete the form, but claim no responsibility for reviewing and signing it. If you want a turnkey operation, you will want your plan provider to handle all aspects of Form 5500.
5) Is the payroll provider acting as a fiduciary? 401(k) responsibilities are complicated. If you want to spend time running your business rather than serving as an investment or administrative fiduciary, make sure that your plan provider has your back. You may find that your payroll provider outsources the 3(38), 3(21) or 3(16) fiduciary services. If so, make sure that any supplemental fees for these services can be found in the total expense ratio of the plan.
Some payroll providers will “hook you up with a guy” who will act as your investment advisor. Make sure you do your full due diligence on this advisor, including understanding if they will act as a 3(21) or 3(38) fiduciary, learning what type of advice they will provide to your employees – and, very importantly – understanding how they will get paid. Are they taking commissions on the investments your employees choose, or are they acting as level-fee fiduciaries, in accordance with the new DOL fiduciary rule?
At ForUsAll, in addition to acting as a 3(38) investment fiduciary, we will help provide full ERISA 3(16) fiduciary services. That means we take the work and liability for administering your company’s 401(k) off your plate. As a result, there are no gray areas when it comes to responsibilities. ForUsAll manages everything from the day-to-day operations on your plan to completing and signing the Form 5500 on your behalf. And our plans stay a step ahead of trouble with automated compliance checks that run continuously. This allows us to proactively fix and correct issues that may arise.
The Advantages of Getting Your 401(k) From Your Payroll Provider – Without the Stress
With ForUsAll’s payroll integration, we help customers who use the most popular cloud-based payroll providers automate their plan administration. Not only does this mean that deferral rate updates are automatically taken care of, (just like you’d get if you got your 401(k) directly from your payroll provider), but you also enjoy the benefits of a 3(38) fiduciary, 3(16) fiduciary services, administration and compliance work, and a low fee, commission free fund lineup. ForUsAll connects with many payroll providers including:
- Wells Fargo
If you are happy with your payroll provider – that’s great! But before you expand that relationship by paying your payroll company to run your 401(k), you may want to step back and evaluate the alternatives. After a little research, you may find that a lightbulb goes off before you flip that switch.