Convenience shouldn’t be the reason why a 401(k) plan is administered by your payroll provider. Some payroll companies have created 401(k) departments as a way to increase revenue. However, it’s never a good idea for the plan sponsor to combine these services. Why? Hidden costs, lack of flexibility, and compliance. There are some great payroll companies in the market, but only when they integrate with their own proprietary plan and not a third party, which locks you in using their plan…That’s when problems can begin.
If the payroll company gives a discounted service on payroll processing because the 401(k) plan is administered with the same company, this is a red flag to compliance. This could be considered self-dealing, as the plan sponsor is the only one benefitting from this discounted service. To avoid this, the plan sponsor would want to have the plan to receive a discount. If a discount is given because there is a package discount, the plan needs to receive the discount, not the payroll provider. If the payroll provider were to receive the discount, it’s perceived as self-dealing because the plan sponsor would lose the discount if he/she changes recordkeepers.
Also, combining the services can also keep the business obligated to the payroll company. It may be convenient, but because your payroll company won’t integrate with any other recordkeeper, that the retirement plan isn’t benchmarked properly. As a business owner, you can’t let convenience get in the way of doing what is right for the participant. Benchmarking a plan is a way to determine the fees paid are reasonable. A change in service providers may be needed to reduce fees significantly, which is part of ERISA compliance.
Something else to consider is whether the payroll provider’s primary service or product to business owners is payroll processing. Nothing else. More than likely, the retirement plan department is a secondary service unit with secondary customer service. Administering the plan correctly is important. Everything aspect of plan administration – from proper design, employee classification, to testing – is so important that it needs to be done right the first time. Mediocre service can lead to fines and tax exemption disqualification. Why would you want to use a company whose main focus is somewhere else? As the plan sponsor, you carry all the liability and the payroll company carries none.
Other items to consider are a lack of investments to choose from. Offering minimal options allows the payroll company less time to be involved. While the 401(k) plan may seem “easy and simple,” the benefits offered by this plan are most likely not going to meet your objectives and goals. With a “one size fits all” you cannot get exactly what you want. You want convenience, but give up the ability to set eligibility requirements, or get an expensive investment menu. The fees charged need to be reviewed to make sure you as the plan sponsor, and your plan participants are not overpaying for “easy and simple” service.
Why work with FiduciaryShield? We work with many different payroll providers who can integrate with different platforms. We work with you to design a plan that meets your objectives and then administer the plan. Our proprietary compliance review will ensure everything stays working order. We help keep costs low for you and your employees so everyone’s dollar goes further by evaluating multiple plan options. Lastly, you will know up-front exactly what you’re paying, to whom, and why. No surprises. Contact us today!