Let’s Talk 401(k) Providers.
An employer 401(k) plan is the most requested employee benefit after health insurance. In 2021, some states, such as NY and NJ, got on board and now require any company with more than 25 employees to offer a retirement package. If a retirement benefit is one of the most desired benefits in the US in 2022, it begs the question – why don’t more companies offer them?
If you are a small business (or even a large business) and have started down this road before, you will recall that it can be no easy task to set up. Between acting as the plan administrator, carrying the fiduciary responsibility of the plan, and educating your employees, it is imperative for a company to call in a pro to make sure the 401(k) is set up properly. In fact, having a 401(k) that is not administered properly can make your company liable for not adhering to federal guidelines set out by the IRS, ERISA, and DOL, so you might end up doing more harm than good!
Enter a Financial Advisor, 401(k) administrator, or a PEO. These 401(k) providers are different avenues which accomplish the same goal: making sure your company offers a 401(k) that is compliant, beneficial to your employees, and cost effective.
How do you choose which avenue is right for your business?
There are three types of 401(k) plans – SEP: Single Employer Plan, MEP: Multiple Employer Plan, and PEP: Pooled Employer Plan. When using a Financial Advisor or 401(k) administrator, you will almost always be defaulting to set up an SEP. When obtaining your 401(k) offerings through a PEO, you will almost always default to an MEP – though some offer SEP options. PEPs are fairly new on the market, only recently introduced in January 2021 and are offered mainly through a Financial Advisor.
Let’s break it down.
What is a SEP – Single Employer Plan?
If you have previously used a 401(k) admin or Financial Advisor (FA), you may have already set up an SEP, or Single Employer Plan. With an SEP, the 401(k) considers only your company’s assets, and your company carries the fiduciary liability of the plan. Included in this responsibility is completing all required filings and audits and providing education and resources to your employees to choose options for their plan. In the event that there is a lapse in this information being provided to employees and the 401(k) loses significant value, your company could be responsible for compensating the difference to your employees.
Offering an SEP also provides your company with more freedom to choose what options are available in your plan, and there should be full transparency of what costs you will have in administering the 401(k). You may also find it simple and straightforward to make changes to a Single Employer Plan, which may not always be the case with others.
Bottom Line: If your company requires a fair amount of autonomy over your plan or a tailored plan with a la carte offerings, an SEP is most likely your best choice, but it may come at a higher cost.
What do 401(k) plans look like with a PEO?
Choosing a PEO as your 401(k) provider means that the PEO adds your company’s plan to their MEP, or Multiple Employer Plan. This commercialized, larger pool means that the 401(k) plan considers not just your company assets, but that of all the companies within the MEP, giving a broader asset base. This results in cost savings not only for your company but for your employees as well. As the administrator of the 401(k) plan, the PEO assumes fiduciary responsibility for the plan, removing the burden from your company’s shoulders. The PEO will complete audits and filings as well as employee education and guidance for their selection process. Additionally, your PEO may offer a dedicated team available solely to help you navigate the 401(k) waters included in their package.
Keep in mind that offering an MEP with a PEO may result in less flexibility as the PEO gets to decide the options that will be offered to its participants and where the 401(k) is invested.
Bottom Line: If your company is flexible about plan design and prefers a more hands-off approach administratively, letting a PEO take the reins may be your best choice. Your company will reap the benefits of a more affordable 401(k) and minimize their fiduciary responsibilities while tapping into all the HR and Benefits resources a PEO has to offer.
A third option is a Pooled Employer Plan, or PEP, which functions somewhere in between the SEP and MEP models. This is where you would have a Multiple Employer Plan without any common thread binding the businesses together, while still being administered by one central plan sponsor. The plan must be sponsored by a Pooled Plan Provider.
Bottom Line: A PEP can be a great option for companies who don’t fit the PEO model but are still looking to take advantage of a less costly and less administrative-heavy option.
How can a PEO broker help?
Deciding whether to move your 401(k) plan to a PEO or whether to start an SEP with another provider is a very individual choice. If you are looking to determine the best course of action for this sought-after employee benefit, this is where your broker comes into play. PEO Brokers have witnessed the lifecycle of various plans with businesses of every shape and size. They can anticipate the potential pain points and help you assess which avenue is right for your business.
How do I know when it is time to reach out to a broker?
Variables to consider include how flexible you want your 401(k) to be for employees and the company, how the current administrative obligations are impacting your business, and whether you are already happy with your current plan. Your broker can break down each option as it applies to your business and provide the guidance you need to make the right call.