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Outsourced 401(k) Administration

By Liz Sheffield

In addition to a competitive salary, paid time off, and flexible work opportunities, today’s employees are looking for a benefits package that includes retirement investment options. According to the 2016 Employee Engagement and Satisfaction Report published by the Society for Human Resource Management (SHRM), “Nearly one-half (48%) of employees rated defined contribution plans (e.g., 401(k), 403(b)) as very important to job satisfaction; two-thirds (64%) indicated they were satisfied with their organization’s defined contribution plan(s).”

These survey results illustrate the importance employees place on retirement plan options when making employment decisions. While the idea of offering such a benefit may seem prohibitive to small or medium-sized businesses, not offering a 401(k) puts your organization at a severe disadvantage when it comes to talent management.

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For employers who can’t afford the expense and effort of bringing retirement investment expertise in-house, outsourcing 401(k) administration makes it feasible to offer this benefit. Especially with advances in technology and automation, a lot of the manual administrative work required in setting up and maintaining a 401(k) is now easily “outsourced” to software.

In addition, unless you’re qualified, Uncle Sam doesn’t want your organization to go at it alone either. As the “prudent expert rule” specifies in the Employee Retirement Income Security Act (ERISA), if you don’t have the required expertise, you need to outsource the plan to independent experts.

Looking for more general outsourcing for all benefits? Check out our post on Outsourced Benefits Administration.

The Requirements: What You Need to Know Before You Decide

It’s not as simple as deciding to outsource your 401(k), selecting a third-party service, and putting a plan in place. First, it’s important to understand basic requirements that exist to protect the retirement plan and ensure its legal compliance:
  • Each plan must have at least one person or entity that controls the administration of the 401(k). The retirement plan activities of these individuals will determine their fiduciary status.
  • While most employers hire third-party service providers to help manage these fiduciary duties, employers are still liable for the investment decisions of every person or entity you appoint with fiduciary duty, so you want to make your selection carefully.

The Benefits of Outsourcing 401(k) Administration

If you see potential opportunities for outsourcing 401(k) administration, you’re not alone. Businesses of all sizes are choosing to outsource retirement investment plan administration not only because they want to keep Uncle Sam happy, but also because they see the positive returns of cost savings, administrative efficiency, limited liability, and trusted expertise.
  • Cost savings: If you bring an expert in-house, you’ll have significant costs to cover their salary, benefits, and maintenance of required investment professional licenses. With an outsourced 401(k), you’re paying for investment-related services but not covering the costs for full-time employment of an investment advisor or team of HR people.
  • Administrative efficiency: Managing investment accounts requires not only financial insight; it requires a system for managing the funds, keeping up to date on legal requirements, withdrawing the money each pay period, and a process for employees to access their accounts. Unless your organization specializes in investments, getting an online 401(k) system up and running that can handle this type of data and your payroll in a secure and timely fashion is not worth the time, effort, expense, or headaches it will require. (Human Interest syncs with many popular payroll providers, like Gusto!)
  • Reductions in liability: Even though you’re still liable for the decisions made by those with fiduciary duties, outsourcing plan management provides some additional protection, depending on the level of control the outside firm holds with the plan management.
  • Trusted expertise: When you select a qualified, informed, and trustworthy financial advisor and 401(k) provider, you’ll benefit from their knowledge and expertise. You’ll definitely want help on fringe cases: employees who may want to take out loans or international employees who want to contribute to their 401(k)s as foreign nationals. As an employer, it’s reassuring to have confidence that the people managing retirement investments for your organization are acting in your best interest and that no conflicts of interest are present.

Making the decision to outsource your 401(k) administration to a third-party provider will relieve you of some of the costs and administrative headaches involved with managing a plan, especially for smaller companies who don’t have robust HR departments and resources. It will also reduce some liability and provide you with a trusted advisor who can help you and your employees save for retirement.

But perhaps most importantly, by offering this benefit you demonstrate your commitment to employees’ financial goals and you meet their expectations about what benefits an employer should provide. In terms of talent engagement and retention costs, those satisfied employees are well worth the investment.

If you’re looking to outsource your 401(k) administration, click here to learn more about Human Interest’s automated 401(k) tool and service.

Image credit: Flickr