LAST REVIEWED Jul 05 2022 15 MIN READ
By Vicki Waun + Independent Freelance Contributor*
When it comes to 401(k) plan administration, there are numerous players behind the scenes. From a high level, all plans must have a plan sponsor, plan administrator, Named Fiduciary, and trustee. However, many plan sponsors outsource some (or all) routine, nondiscretionary, functions, and possibly some fiduciary functions, to a service provider who may go by a variety of names, such as recordkeeper, plan administrator, or third party administrator (TPA).
Different kinds of companies offer some version of recordkeeping services, including (but not limited to) fund companies, payroll companies, and insurance companies. And these service providers may offer overlapping services. That’s why it’s important to explain the differences between these services and clarify what 401(k) recordkeeping is—and isn’t.
What does a 401(k) recordkeeper do?
The recordkeeper is an essential component of 401(k) plan administration. Simply put, recordkeepers keep track of employees’ money in a plan. A 401(k) recordkeeper is fundamentally the bookkeeper for the retirement plan, keeping a record of who is in a sponsor’s retirement plan and what investments they own, as well as tracking and handling investment elections, contributions, and distributions.
The recordkeeper is responsible for producing participant account statements as well as any other notice or documents they agree to assist the plan sponsor with. Because recordkeepers keep track of who owns what in the plan, they may also handle related tasks like monitoring employee eligibility and vesting, as well as enrolling employees in the sponsor’s plan. Recordkeeping service providers also often manage the website employees use to access their retirement accounts, and may offer resources for employees’ financial wellbeing. Recordkeepers may make transfers or other requests such as executing trades requested by plan participants.
Recordkeepers record the money that comes into the plan, including contributions, loan payments, and rollovers—and the money that goes out, like distributions and loans. The money coming into the plan must be carefully identified because money types are treated differently (is it pre-tax or Roth? An employer contribution?). For example, an employee leaving an employer can take 100% of their own 401(k) contributions but can only take matching contributions that are vested. Recordkeepers must allocate assets to employee accounts and update balances and investment fund share prices. And to do so accurately, they must know which dollars are which.
Recordkeepers and compliance
Because 401(k) recordkeeping tasks—broadly, monitoring the investments and assets of the plan—are highly regulated by the Department of Labor (DOL) and IRS, falling out of compliance can have serious (and potentially pricey) consequences. So, it’s essential not only that your recordkeeping partner’s services align with your business’s needs, but also that your service provider monitors its operations and keeps up with new regulations to ensure compliance.
Three important ways that recordkeepers help make sure that your company’s retirement plan is following all the rules is by:
Conducting required annual compliance testing
Preparing Form 5500
Providing annual audit support
Conducting annual compliance testing
Nondiscrimination testing is required annually by the IRS to make sure retirement plans don’t unfairly benefit company owners, sometimes referred to as “key employees,” or highly compensated employees (an individual that has received compensation of more than $135,000 if the plan year is 2022, or has owned more than 5% of the interest in a business at any time in the preceding year).
Because the tests weren’t designed with small businesses in mind, they can be difficult for smaller companies to navigate. The best way to avoid falling out of compliance is by having the recordkeeper and plan sponsor regularly monitoring plan contributions. Ideally, the recordkeeping system used by your plan’s recordkeeper makes it easy to do this. Human Interest provides employers an easy-to-use dashboard in which they can look at high-level statistics on contribution rates for employees.
Compliance testing is a complex subject, which is why we wrote a guide to nondiscrimination testing for small businesses.
Preparing Form 5500
Form 5500 is an annual report required by the IRS and the DOL from all businesses with a 401(k) or other retirement plan. One purpose of Form 5500 is to evaluate the financial health of a company’s employee benefits plan, including deposits of participants’ deferred salary or wage contributions in their 401(k) accounts. The Form 5500 is typically prepared by the recordkeeper but the employer must sign, unless the recordkeeper has accepted fiduciary responsibility to sign the 5500 as a 3(16) fiduciary (more about the distinction below).
Failing to file a Form 5500 on time exposes employers to potentially severe penalties, including an IRS penalty, increased by The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), of $250 per day, up to a maximum of $150,000, and a DOL penalty of $2,529 per day, with no maximum.
For more information on Form 5500, read All About Form 5500.
Providing audit support
401(k) plans are required to undergo an audit if they have more than 100 eligible participants as of the first day of the plan year (including terminated participants with a balance remaining in the plan). These audits require businesses to provide documentation such as plan documents, payroll data, and time-stamped communications to ensure the plan meets regulations. Audits must be performed by an independent auditor that does not have ties to an employer’s plan. However, because your recordkeeper helps produce financial reports required to ensure your plan in working order, recordkeepers are indirectly responsible for helping plans pass audits.
Remember, the plan sponsor is responsible for plan administration even when they outsource most compliance matters. This means that the plan sponsor can be responsible for significant penalties. Ultimately, integrating payroll and recordkeeping systems can help businesses prepare for audits. Here’s what you need to know about IRS annual 401(k) audit requirement.
Recordkeepers or TPAs? What are 3(16) services?
In addition to handling ministerial tasks, some recordkeepers also handle specific fiduciary-level responsibilities. These service providers may be referred to as recordkeepers or TPAs, who sell “3(16) services” for an additional fee, related to the additional risk exposure they’re willing to take for the plan. These services can be attractive, especially to smaller employers, who may lack the staff to keep up with signing distribution forms and other discretionary issues that can require specialized knowledge of retirement plan rules and complex recordkeeping systems.
Why are they called “3(16)” services? ERISA Section 3)16) requires that all retirement plans name a “Plan Administrator.” The Plan Administrator is responsible for all fiduciary issues related to the plan’s operation. The employer sponsoring the plan is normally identified as the Plan Administrator in the plan document. However, an employer may negotiate with a service provider to act at the Plan Administrator or to take on select fiduciary responsibilities of the Plan Administrator.
Don’t be fooled by titles! A recordkeeper that only handles routine, non-discretionary, tasks to a third-party service provider, a recordkeeper is generally not considered a fiduciary because they perform services under the direction of the ERISA 3(16) fiduciary.
The employer retains all fiduciary decision-making authority in this type of recordkeeper arrangement, even if a service provider calls itself a “plan administrator.” For more information, read about the differences between 401(k) plan administrator and sponsor duties.
Fiduciary duties of a recordkeeper
Recordkeepers that offer services as a 3(16) service provider agree to take on certain fiduciary duties and the increased risk that comes along with them. Service providers who have accepted particular fiduciary responsibilities are legally responsible for managing the regulatory and administrative aspects of your 401(k). In other words, a recordkeeper that has not accepted fiduciary responsibility does not—and should not—make any discretionary decisions as they perform the recordkeeping functions.
Many service providers who offer 3(16) services don’t step fully into the role of the 3(16) Plan Administrator. Instead, they have a list of specific services for which they’ll make fiduciary decisions or take fiduciary responsibility. Some tasks a 3(16) service provider may agree to take over in a fiduciary capacity include:
Taking responsibility for signing a plan’s annual Form 5500
Ensuring loans meet IRS guidelines
Approving a 401(k) hardship withdrawal after review of appropriate documentation
Authorizing in-service and termination distributions
Securing a fidelity bond
The list of available 3(16) services is unique to each provider. Plan sponsors should fully review these and understand exactly what fiduciary responsibilities the provider will—and will not—take on. It's a good idea to check the service agreement to look for limitations on the services, fees for services in excess of those limitations, and any excluded services.
3(21) and 3(38) fiduciary responsibilities
ERISA also includes rules that apply to service providers who provide investment services, rather than administrative services. Recordkeepers are not typically qualified to provide investment services. Even if the plan hires a 3(21) or 3(38) investment fiduciary, the plan sponsor still administers the plan and is responsible for selecting and monitoring the hired advisor.
Read about the differences between 3(16), 3(38), 3(21) fiduciaries for more information about the types of fiduciaries a plan sponsor can engage.
401(k) recordkeeper fees
Generally, recordkeepers charge a flat rate per participant or a percentage of assets under management for their services. Businesses may absorb the cost of recordkeeping, or they may pass the cost to their employees. A business may decide to pay for recordkeeping in order to:
Keep investment costs inside the plan as low as possible for employees, including a business owner/employee
Qualify for a tax benefit, if paying for the plan is a deductible expense
If employees are paying for recordkeeping via a flat fee, it will be deducted from their account at regular periodic intervals—monthly or quarterly, for example. Flat fees don’t often change, so it’s a predictable, recurring cost. If employees pay an asset-based fee, the money comes out of employee investments. The fee should be disclosed on the quarterly participant statements.
Recordkeepers may also charge “transaction” fees for specific actions or events such as disbursements of distributions and loans, which must be paid directly by the participant or by the plan. However, Human Interest never charges transaction fees. Eliminating 401(k) processing fees not only enables us to elevate our affordable pricing model—it helps us stay true to our commitment to helping the financial wellness of our customers and their employees.
Finding the right recordkeeper for your business
The right recordkeeper for your business is a reliable, trustworthy service provider who offers the specific services your business needs. It may be useful to make a list of the tasks you’d like your recordkeeper to perform before you start searching—to help ensure you get what you need. Here are some things you should know about your recordkeeper:
Cybersecurity protocols (and any breaches)
How recordkeeping interfaces with payroll data
How fees are determined and paid
If you have an assigned relationship manager
If statements and other communications provided to employees are user-friendly
How employee participation in plans the provider services has increased in the past 10 years
Requirements for particular fee reductions, (e.g., enrolling in the provider’s proprietary funds)
Recordkeeping with Human Interest
At Human Interest we’ve developed recordkeeping and administrative platforms designed to give you faster response times and enhanced customer service. Created to reduce your administrative burden, our in-house recordkeeping platform offers:
Faster, more accurate contribution processing
Reduced total payroll processing times
More streamlined customer service with combined recordkeeping and administrative services
Simply put, Human Interest syncs to 200+ payroll providers and handles recordkeeping and compliance so you don’t have to. Interested in learning more? Get started today.
*Amy Johnson is an independent contractor commissioned by Human Interest to help contribute to this article.
Vicki Waun + Independent Freelance Contributor*
Vicki Waun, QPA, QKC, QKA, CMFC, CRPS, CEBS, is a Senior Legal Product Analyst at Human Interest and has over 20 years experience with recordkeeping qualified plans, along with extensive experience in compliance testing. She earned her BSBA in Accounting from Old Dominion University and is a member of ASPPA.