Michael Roloson is a Director with PEO Focus, a PEO Consulting Firm that assists their clients with understanding the complexities of PEO and PEO related solutions. You can learn more about PEO Focus at www.peofocus.com or contact them directly at info@peofocus.com.
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Should You Use Your PEOs 401k Plan?
Michael Roloson • Feb 24, 2020
Evaluating PEO 401k Options
One of the most frequent questions we are asked by those looking into partnering with Professional Employer Organizations is "What are the pros and cons of switching to the 401k offered by the PEO?".
Often it can be a struggle to get a straightforward answer from the PEOs themselves. With the 401k plan being one of the most sought after Employee Benefits, it is important to understand the differences between using the PEO option or an outside solution.
401k Plan Options When Working with a PEO
There are two different ways to incorporate a 401k retirement plan for your employees when partnered with a Professional Employer Organization.
The first way is through a Multiple Employer Plan which is often referred to as an MEP. They can offer these plans due to the Co-Employment relationship that is created when entering into your partnership. An MEP is a retirement savings plan adopted by multiple employers that from an income tax purpose are unrelated and do not share ownership.
The second way is traditional: you offer a 401k plan by sponsoring it yourself. A PEO will refer to this option on their paperwork as a SEP or a Single Employer plan.
Since employees are tied together by two EIN numbers in a Co-Employment relationship, you will be able to choose between implementing the MEP plan via the PEO or sticking with a Single Employer Plan (SEP) from an outsourced third party. In the event you utilize a third party the PEO will handle the deductions via payroll and track accordingly for tax purposes.
Benefits of the Multiple Employer Plan with a PEO
As we review many of the benefits, please take note that each
PEO 401k solution will vary from one PEO to another. They will have different terms, funds that are available, and partners such as Slavic, TransAmerica, Voya Financial, Reliance Trust and others.
1. Outsourcing your 401k Fiduciary Liability
There are three major responsibilities that the PEO will address when taking on the Fiduciary Liability associated with offering a retirement plan to employees.
First is the 3(16) which lists the PEO as the plan administrator. This means the PEO assumes responsiblity for determining eligibility, providing disclosures notices to participants, maintaining plan records, authorizing plan investment decisions, and filing the form 5500 annual report to the Department of Labor.
The second Fiduciary role that the PEO assumes is 3(21). In this role, the PEO will provide participants in the 401k with education materials and access to investment advice.
Lastly in a role that is most notably absent in most 401k plans, is role 3(38). This fiduciary role puts in writing who holds the legal responsiblity of Investment Manager that removes the Employer from this liability. This prevents the Employer from being held responsible for the selection of investment options, reporting on investments, benchmarking investment options, managing investment policy statements, and replacing investment choices as deemed necessary.
In short, if the stock market takes a turn for the worse, Employees could experience a significant reduction in 401k plan assets. If it is proven that they did not have access to educational material, that their fund choices were not being actively monitored, or that the investment options available were not being maintained to the highest standard then (without contracting out these fiduciary liabilities) the Employer could be held financially responsible for Employee losses.
By implementing a PEO’s 401k plan option, an Employer can reposition these responsibilities onto the PEO while also feeling confident that Employees are being provided high-level options for their retirement.
2. Reduction in 401k Adminstrative Costs
Implementing a 401k plan comes with costs associated with that plan. If you are unsure of what your costs are with your current plan, a good place to start is by taking a look at your 408(b)(2) fee disclosure form.
For groups with over 100 eligible employees, the IRS requires that there be an annual audit through form 5500. As a plan sponsor, the PEO will handle this process for you and can provide savings anywhere between $5,000 - $10,000 annually.
From an asset management perspective, a PEO will often hide a majority of its fees inside the funds and carry a small quarterly maintenance charge for the Employees. For groups with less than One Million Dollars in assets, this often leads to additional costs savings due to the PEO having much lower asset-based fees than what can be found on your own. That said, not every PEO has the strongest 401k offering so this needs to be evaluated on a case by case basis.
A PEO will typically charge a setup fee and an asset exchange fee in the event you are rolling over funds from a previously existing plan. These fees can often be negotiated or eliminated in the event the process is not being rushed.
Benefits of a 401k Plan Outside of the PEO Relationship
1. Making Changes to 401k Plans Outside of a PEO is Much Easier
Do not get caught overlooking the initial savings at the expense of the long term vision of the company. In the event that you leave your PEO relationship and you have your 401k with them, you will be forced to make a change to your plan.
If you end up changing PEO’s or shifting to an unbundled solution more than once over a five year period, you will have moved your 401k assets three separate times within that time period. Each time you make the change you encounter a blackout period which can impact an Employees ability to take advantage of potential market gains. It also can cause confusion and be a large burden for employees to constantly switch providers.
For those looking to scale their business and add employees over the years, this component or expense alone usually is enough of a pro alone to implement a solution outside of the PEO. This will allow you to reduce fees that come with changing 401k providers and allow Employees to more easily manage their funds.
2. 401k Plans Outside of a PEO Have Greater Flexibility
While a PEO will usually have a very strong fund line-up for participants to choose from, they will not be able to customize a fund line-up or build in a grouping of funds (such as Vanguard)
in the event that there is something specific that they are looking for. If you prefer that type of flexibility or have a specific fund family you prefer to utilize, then you will want to avoid implementing the 401k solution available from the PEO.
In addition to asset choice, having your 401k plan outside of a PEO brings technology flexibility. When utilizing a PEO, you are limited to the technology that is offered by the PEO and their 401k partner. For some this can be very basic. With the importance of retirement education at the forefront of Employees minds, having your 401k set up outside of a PEO allows you to choose which vendors and technology you want to incorporate in your plan. This allows you to provide employees a greater level of financial wellness information.
On the high end of the technology spectrum, Employees can load information into the system and have the retirement tools recommend an overall Financial Wellness plan. They will map out if available funds would be better served in the 401k plan, a HSA plan, a college savings account, or even towards paying off debt. These tools are considered a real asset with Employees who are looking for guidance towards their overall Financial Wellness in addition to identifying strategies to reach retirement goals.
Identifying Which PEO 401k Strategy is Best for You
Both strategies have their place so it is important to take assessment and see which option proves most beneficial to your group.
After factoring in costs for the business and its employees, the administrative burden of each option, and the access to technology for employees, you will be in a better position to make a decision that can positively impact your long term business success. Employees deeply value an investment in their retirement so whichever 401k option you feel is best for your group will certainly be welcomed!
About the Author
PEO Focus, an HR and Employee Benefits Consulting Firm was named the Best Employee Benefits Consultancy for 2024 in the state of North Carolina.
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