It’s not unusual for small and mid-sized businesses to rely on an outside organization to handle HR needs – a Professional Employer Organization, or PEO. A PEO will usually handle payroll, state and federal employment law compliance, employee onboarding and offboarding, workers comp, and benefits – which sometimes includes the company’s 401(k).*
Why PEOs handle 401(k)s
One of the primary benefits of working with a PEO is, well, benefits. In particular, PEOs try to combine the purchasing power of their clients to get lower rates on benefits like medical, dental and vision coverage, life insurance and personal accident insurance, short-term and long-term disability insurance, and retirement plans.
So why do PEOs often manage their clients’ 401(k)s? Simply because they’ve bundled together a menu of benefits and include retirement plans as one of these services.
Should you use your company’s PEO as your 401(k) provider?
As an independent 401(k) advisor, we aren’t really in a position to judge your PEO’s performance managing healthcare and other non-401(k) benefits.
However, we strongly feel that you should evaluate independent solutions for your company’s 401(k). Here are some of the reasons that you should talk to an independent 401(k) advisor and benchmark your PEO’s 401(k) offering against market-leading options:
- Understanding your 401(k) fees. 401(k) fees can be difficult to understand, and PEOs sometimes bundle pricing for their services into a complicated, tangled mess. Remember, as the 401(k) plan sponsor, your company has a fiduciary responsibility to monitor, understand and deem the fees to be reasonable for the retirement plan provider that you have picked! You can read about a recent Supreme Court decision that highlights this responsibility.
- Reducing your costs. There is no guarantee that your PEO can provide the lowest cost 401(k). In fact, it is possible that your PEO is offering a high-cost plan – and the only way for you to know is to benchmark your plan against other options. In general, our team has found that Professional Employer Organizations don’t always have the lowest cost 401(k) plans, nor do they always offer the lowest cost investment options.
- Recordkeeping and fund independence. Many PEOs work with only their own recordkeeper, or with a single recordkeeper. It’s hard to know if this is the best recordkeeping option for your participants, and there is no guarantee that this single recordkeeper choice is a low-cost leader. Additionally, it is possible that the fund line up that the PEOs offer through these single recordkeeping options are not the lowest cost. That’s why we typically offer low-cost target-date funds from cost leading fund providers like Vanguard.
- On going compliance monitoring. Payroll companies and PEOs may be able to link payroll with the 401(k) infrastructure, but that does not guarantee that they are providing full administrative services. Just because the PEO is integrating payroll does not mean that they will do a great job on compliance, especially if they don’t offer a 3(16) Fiduciary service (entire articles have been written about this risk, see the one by ERISA attorney Ary Rosenbaum: “You Shouldn’t Hire Your Payroll Company to Run Your 401(k).”) If you are still doing government paperwork, running antidiscrimination testing or signing the Form 5500, then your provider is not acting as a 3(16) Fiduciary. The right 401(k) advisor will not only integrate your payroll with your 401(k) system, but will also take on the ongoing administrative work for your plan and sign your Form 5500 – taking on as much of the fiduciary liability as the Department of Labor will allow.
- Employee education and advice. Good 401(k) advisors offer more than just a solid 401(k) investment menu – they also offer independent advice to your employees, and know how to create a plan design that focuses on driving employee financial wellness and retirement success. Does your PEO have a team of investment advisor representatives available to answer employee questions?