How Combining Payroll and 401(k) Plans Can Benefit Your Business

401(k) retirement savings plans are a highly valued employee benefit, and offering one can help your business attract and retain top talent in today’s tightening labor market. Like payroll processing, however, 401(k) plan administration has extensive rigorous legal and fiduciary requirements. Small companies, in particular, may not have staff members who know how to manage retirement plans.

By engaging your payroll vendor in administering your company’s retirement plan, you gain the benefit of its expertise, technology, and reliability while streamlining the tasks associated with both functions.

The current state of retirement

For the increasing number of workers planning for retirement, 401(k) plans are an extremely important. Yet with pensions on a continual decline and the Social Security Administration projecting that Social Security funds will be depleted by 2034, the tax benefits and employer contributions available through a typical 401(k) plan are invaluable to the average American planning for retirement.

Unfortunately, many employees aren't afforded this option for retirement savings. According to Paychex payroll and retirement data from January 2018 to June 2023, just over one-third of small-business employers (36.9%) offer some type of plan, a rate showing a steady increase in recent years, up 6.0% from 2018. Business size also matters, as 20.0% of businesses with the fewest number of employees (1-4) offer a retirement plan while 61.2% of businesses with 20-49 employees offer plans. 

There is also a generational gap when it comes to ownership of retirement accounts. At 58.1%, baby boomers were most likely to own at least one type of retirement account, while 56.1% of Gen Xers had accounts, according data from the U.S. Census Bureau. Just shy of half of Millennials (49.5%) owned at least one type of retirement account, with 7.7% of Gen Zer having a retirement account.

In short, a job is not enough to ensure long-term security. Employees recognize the importance of routinely saving for retirement early, and they are more likely to prioritize employment opportunities that provide a reliable vehicle for doing so.

Employer misconceptions about 401(k) plans

There’s a common misconception among many small businesses that the administrative expenses of offering a 401(k) plan are costly. In reality, 401(k) plans can be cost-effective for companies of any size, with lower operating costs and bigger advantages for both employers and employees.

Another common concern is the time and effort required to comply with 401(k) management and regulatory data. Many employers believe that managing a retirement plan would involve hiring a dedicated plan manager or someone with special expertise in 401(k) census data and contribution management. Fortunately, the time and expertise required to properly manage a 401(k) plan can be greatly streamlined by combining payroll and 401(k) plan management through a single system.

Benefits of combining payroll and 401(k)

By engaging your payroll processing company as your 401(k) recordkeeper, you leverage the vendor's knowledge of fiduciary regulations. The payroll firm can integrate 401(k) plan tasks with payroll administration to automate the transmission of contributions and the collection of required data. Recordkeeping is streamlined, paperwork is minimized while the responsibility for managing the 401(k) plan resides with the trustee.

Here are some additional benefits of integrating retirement plan management with your payroll vendor:

1. Collection of accurate employee census data: Retirement plan providers usually require complete census data on employees to track eligibility and plan entry dates. By integrating your 401(k) administration with payroll, this task becomes significantly easier.
2. Time and money savings: Outsourcing your 401(k) administration to your payroll provider frees staff to focus on your core business.
3. Compliance: 401(k) recordkeeping is heavily regulated. By outsourcing to a payroll provider, which is typically staffed with experienced professionals with expertise in tax services, data gathering and application, and fiduciary guidelines, you gain a partner that can help you remain in compliance.
4. Peace of mind: Your employees' money will be deducted and transmitted promptly and securely.
5. Reduced paperwork: By automating the transmission of contributions and the collection of required data, you can reduce paperwork.
6. Data security: Well-established payroll firms use the latest technology and are equipped to handle large volumes of transactions and funds.
7. Timely investment of employee 401(k) contributions: Because the payroll provider already processes workforce funds, they can quickly and easily add the necessary retirement plan deductions.
8. Familiarity with your business: Your payroll provider already knows your company and the needs of your workforce, so it is uniquely positioned to handle your company's 401(k) administration as well.
9. Assistance with supplemental forms: A knowledgeable vendor will be fully informed on all federal regulations governing qualified retirement plans and can provide any associated reports and forms for your organization, such as:

• Quarterly management reports;
• Compliance testing results;
• Participant statements; and
• Forms required annually by the Department of Labor and IRS.

Don't let the fear of heavy administrative burdens deter you from offering a benefit that can give your company a competitive edge in hiring. Learn more about the benefits of a fully integrated retirement plan with your payroll processing system.