Re(Defining) Retirement Plan Payroll

According to Vestwell’s 2019 Retirement Plan Survey, plan sponsors’ number one priority when it comes to selecting a retirement plan provider is reducing their administrative burden. And while this can include myriad activities (onboarding employees, eligibility, loans, etc.), the most commonly administered task by far is payroll. For small businesses, payroll is particularly prone to error given that it’s time consuming, complicated, and likely being handled by someone wearing many hats (often the business owner herself!). By intimately understanding the payroll process, you will be better prepared to help sponsors resolve issues or, better yet, identify and select an offering that minimizes them.

Payroll and 401(k) Communication Pitfalls

Everything from who participates in a plan to how much is withheld relies on accurate information from the payroll provider. When bad data is communicated, this creates extra (and tedious) work for HR admins. There are four key activities where a 401(k) and payroll provider share data, resulting in common plan sponsor “pitfalls.”

1. Onboarding

• Initial census - When adding employees and their personal information during plan setup, sponsors must format the data so it is compatible with the recordkeeper in order to pass the information from one provider to the other.
• Establishing pay groups - If applicable, sponsors also need to establish pay groups. Setting this up incorrectly has major implications for how payroll is processed further down the road.

2. Eligibility

• Elapsed time vs hours worked - Common factors for determining eligibility include elapsed time (how long an employee has been employed) and/or how many hours an employee worked. Oftentimes hours can be difficult to track - or not tracked at all - making determining who is and isn’t eligible a complicated undertaking for small businesses.
• Rehire dates - While sponsors may want to use rehire dates to determine eligibility, oftentimes small businesses don’t keep clear records of this data.

3. Deferrals

• Deferral changes - As deferral changes are made, information has to flow from the recordkeeper to the payroll provider to ensure the amount an employee wants to contribute is withdrawn from their paycheck. Oftentimes issues arise when the HR admin does not update these changes in the payroll system in a timely manner.
• Employer match - Having a simple way to calculate your match can alleviate the level of work it entails. For example, some plan designs have employer matches on more frequent schedules (i.e. monthly) while others may be only calculated annually.

4. Loans

• Repayment schedules - For plan designs that allow loans, complications occur when sponsors don’t accurately set up a repayment schedule. Further errors may arise when plan sponsors forget to stop the repayment of a loan and a participant overpays the owed amount.

Solving Challenges

To minimize the amount of errors that occur during the payroll process, there are a number of solutions advisors can recommend to their clients.

1. Integrate

With so much information being communicated between the HR admin, payroll provider, and recordkeeper, it’s no wonder there is bad data integrity. Fortunately, there are levels of integrations that can substantially reduce HR’s responsibilities.

• 180 integration - With a 180 integration, changes in the payroll system are automatically reflected in the recordkeeping system. However, the HR admin still must manually pass deferral information from the recordkeeper to the payroll provider.
• 360 integration - With a 360 integration, all information automatically flows back and forth between the payroll provider and recordkeeper. This means that as changes are recorded in either system, they are always being updated to reflect the most recent information without the HR admin having to do a thing.

2. Be an Advocate for Your Client

• Set expectations - One of the most important things you can do to avoid a frustrated client is to set the right expectations. Make sure the HR admin who is running payroll - and not just the business owner - understands the administrative lift. Work with the payroll provider and recordkeeper to ensure all relevant parties get the training they need.
• Balance priorities - Certain plan designs create more work. As you help plan sponsors create their plan, flag the activities that will require more time to administer on the payroll side and make sure they are worth implementing.
• Get outside help - When it comes to small businesses, whoever is administering the plan is likely not a payroll guru. To help alleviate the workload, have them consider outsourcing parts of the payroll process to their CPA, payroll provider, or a 3(16) admin.

3. Ask the Right Questions

• Payroll provider: Do you have the features my plan needs? The payroll provider must be able to support the plan design the client needs. For example, if your client needs to calculate hours to determine eligibility, make sure the payroll provider is able to record this data.
• Payroll provider: Is your technology user friendly? More than likely their answer will be “of course!” But take the time to find out for yourself. If it’s confusing for you, it probably will be for your client as well.
• Payroll provider: How can we partner? The best way to start building a relationship with a payroll provider is to bring them opportunities. By bringing them the right prospects, you can build trust and encourage them to bring you leads in return. Start by reaching out to local and regional payroll providers or by asking your small business owner clients which providers they work with.
• Recordkeeper: Which payroll providers do you integrate with and how? Integration is often thrown around as a buzzword, so when selecting a recordkeeper, make sure you understand exactly how they work with your client’s payroll providers including whether an integration is direct or through API and what level of integration they offer. If they don’t integrate, it’s worth understanding how they approach payroll generally.

With all the different information that must pass between recordkeepers and payroll providers, there will always be challenges. But by understanding how the systems communicate, you can provide guidance as issues arise, minimize the amount of time clients spend fixing errors, and show prospects how the right solution can significantly streamline their administrative tasks.