Pros and Cons: What is a Professional Employer Organization (PEO)?
As you focus on growing your small business you may have considered working with a Professional Employer Organization, or PEO. Or you may have already outsourced some tasks to such a group.
A PEO is an outside business that handles employee management tasks like payroll and insurance benefits. A PEO can even recruit and train employees. To facilitate these activities, the PEO actually hires a company’s workers and becomes their employer of record for tax and insurance purposes. Some employers have found that the costs associated with a PEO can be offset by lower premiums for workers comp, disability and health insurance. Also, employers may find they are able to offer some benefits and perks (a Health Savings Account, for example) that would otherwise be unavailable.
PEOs often can save companies money on insurance because they pool employees from several companies. With the leverage of hundreds of employees, a PEO can access the lower rates typically available only to large companies. As a result, the small businesses can gain coverage for medical, dental and even vision coverage at big company rates.
But what about PEOs and your retirement plan?
Given their success in pooling employees to improve their purchasing power, some PEOs are using the same strategy to enter the retirement plan marketplace. It’s no secret that small companies pay relatively more to run their retirement plans than large companies. So it makes sense that PEOs would attempt to expand their business model to include retirement plan services. PEOs seek to use that same buying power to offer a lower cost 401(k) or 403(b) plan with the same investment menus available to much larger companies.
If you have a PEO, should you sign on for the retirement plan servicing as well? We strongly believe that you shouldn’t sign on with any provider until you have completed a full evaluation of the retirement plan on its own merits. That is, even if your PEO is a cost effective alternative to employee benefits administration in general, that doesn’t mean they are the right option for your employees’ retirement plan.
That’s why we have put together six reasons why you should talk to an independent advisor before signing up for your PEO’s retirement plan administration services.
Six reasons not to treat your retirement plan as just another PEO service.
The cost to run a retirement plan can be difficult to understand given all the moving parts. If a PEO bundles these costs with other services, getting a grip on plan expenses can become even more difficult. Remember, as the plan sponsor, your company has a fiduciary duty to understand and monitor plan fees, as well as to determine their reasonableness.
It makes sense that a PEO can use the leverage of hundreds or thousands of employees to save money on health insurance, but a retirement plan is arguably a different animal. There’s simply no guarantee that a PEO’s services will be any less expensive than those offered by an independent provider. In our experience, PEOs don’t always have the lowest cost plans, or even the lowest cost investment options.
A retirement plan serviced by a PEO may feature only one recordkeeper, maybe even the PEO’s own. This single option may or may not be the best choice for you and your employees. It may not even be the least expensive option.
Integrating payroll to your retirement plan is a great way to reduce your company’s administrative burden. But just because payroll and the plan are linked doesn’t mean that the PEO is providing full administrative services. A good investment advisor will not only integrate payroll with your retirement plan, but will also take tough administrative tasks such as non-discrimination testing, completing and signing Form 5500, and handling government paperwork off your plate. An advisor who offers 3(16) fiduciary services can save you administrative headaches and reduce your fiduciary liabilities.
Investment costs and options.
While the PEO may indeed have negotiated lower costs with an investment advisor, you should know exactly what options are available in the mutual fund line-up. For example, if the PEO has partnered with a large financial services company, be sure to know if that company’s proprietary funds are primarily featured in the plan, or if other options are available. And even if the PEO does partner with a mutual fund provider, the fund line-up may not be cost competitive.
A good investment advisor does more than put together a solid mutual fund line-up. It can also offer independent financial advice to your employees, and design a plan that increases the odds of your employees’ retirement success.