LAST REVIEWED Aug 10 2021 8 MIN READ
By The Human Interest Team
Changes in legislation have made it so more PEOs can offer retirement plans
PEOs may offer plans to companies with at least one employee other than the owner
However, businesses should still compare their options to determine the best retirement plan provider
If your small business is already using a PEO, or professional employer organization, it makes sense to consider their retirement plan options. And with changes in legislation and Department of Labor (DOL) rules, more PEOs are likely to offer retirement plans.
The most obvious advantage to small businesses of signing on to their PEO’s retirement plan is not having to worry about working with an additional vendor. Additionally, because PEOs use the combined purchasing power of their clients to get lower rates, their plans may be low-cost.
But, it’s important to know that there are some significant potential downsides to adding “retirement plan” to the list of tasks your PEO handles for you. Here’s what you need to consider to make the best decision for your company and the welfare of its employees.
What is a PEO?
A PEO typically handles HR tasks like payroll, taxes, federal and state employment law compliance, onboarding, and employee benefits for all its clients’ employees. By pooling all those employees, a PEO can provide services to those client companies at a lower cost, while increasing efficiency, and reducing their administrative load—making PEOs an attractive HR solution for small- and medium-size businesses.
What kind of retirement plans can a PEO offer?
In addition to offering multiple employer plans (MEPs) to their clients, PEOs can now offer association retirement plans (ARPs) as well. This is as a result of the DOL’s new rule that essentially broadened the definition of MEPs to include ARPs. Small and medium-size employers can now join a plan with other employers in the same geographic region, regardless of industry, or vice versa: employers in the same industry but different geographic regions.
The only type of retirement plan PEOs are legally allowed to offer are defined-contribution plans, such as 401(k)s, and can provide them only to companies that have at least one employee other than the owner. Self-employed working owners cannot currently join a plan operated by a PEO.
To offer a retirement plan, the PEO has to meet four requirements:
Perform substantial employment functions on behalf of its clients
Have substantial control over the MEP or ARP
Ensure that each client company has at least one employee participating in the plan
Offer the plan only to those clients and their employees
What you need to know before joining a PEO retirement plan
So, if you’ve determined your business is eligible to join a PEO’s retirement plan, how do you know if it’s the right option for you and your employees?
Identify costs and liability
The flip side of “fewer vendors” is that businesses must understand how much a PEO is charging them for which services. If your PEO is bundling its pricing, it may be difficult to determine what they’re charging you specifically for the retirement plan. Furthermore, while a PEO should be able to offer a low-cost plan if it’s pooling the purchasing power of its clients, that doesn’t guarantee that you’re getting the lowest-cost plan or investment options.
Regardless of who is managing your company’s retirement plan, your business has an ongoing fiduciary responsibility to its employee-participants to monitor and understand the costs of the plan, and deem them reasonable. However, more than one-third of plan sponsors don’t know they’re a fiduciary. And if an employer fails to uphold their fiduciary duties, they may be held personally liable for a situation in which a plan's fees are unreasonable or excessive, investments are not diversified, or decisions regarding the plan aren’t made in the best interest of its participants.
A recordkeeper is responsible for tracking contributions, earnings, and investments and directing the custodian to execute trades requested by plan participants. Many 401(k) providers outsource some, or all, of their recordkeeping and administrative functions to a third party—whereas many PEOs work with their own recordkeeper or a single recordkeeper. Ultimately, it’s important to vet a PEO and their affiliated service providers to confirm if their recordkeeper is the best option for your business’ retirement plan.
While PEOs may be able to negotiate low costs with investment advisors, it’s still important to understand your options and confirm what you’re paying for. PEOs may come with an inherent lack of flexibility within their benefit offerings. What this means is that participants may be locked into a limited fund line-up and unable to customize their investments to fit their needs (including investment preferences such as risk tolerance). While many PEOs offer a line-up of mutual funds (which can help protect investors from sudden changes in stock values), it’s still important to ensure that your participant’s investments are diversified and come with low costs.
PEOs have the advantage of being able to link payroll with plan administration, but that’s merely the tip of the iceberg in managing a highly-structured, tax-exempt entity like a retirement plan. Your retirement plan provider is responsible for compliance monitoring; if given inaccurate or incomplete data, they must be able to identify errors and rectify them. Errors in retirement plans can have broader and more serious consequences than errors in payroll, and they can involve attorneys, the Internal Revenue Service, and the DOL.
PEOs simply may not have the same expertise as a financial services firm, making them less likely to catch any errors and correct them as well as a financial services firm would.
Employee education and advice
If your business is offering its employees a retirement plan option, that plan should include independent advice to help your employees reach their retirement goals. A good retirement plan provider will know how to design or choose a plan that suits your business and its employees.
Many 401(k) providers offer helpful retirement resources—including articles, calculators, and more—to help participants plan for their future. Additionally, the most technology-driven providers offer built-in investment advice that diversifies assets and rebalances portfolios. By leveraging proprietary technology, these providers can recommend contribution rates and risk settings to participants based on their individual circumstances.
What’s the right type of retirement plan for your employees?
The convenience of a PEO’s retirement plan may be tempting, but it shouldn’t keep you from doing your due diligence in choosing a retirement plan provider for your business. It’s essential to compare what your PEO is offering to industry standards in terms of fees, expertise, and flexibility. Human Interest can help you choose the right kind of plan to keep your employees’ futures on track. Learn more about pricing and other 401(k) plan details.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.