Why 401(k) payroll integration should be a key strategy for TPAs
Contribution processing is a crucial aspect of 401(k) plans. When not handled properly, it can create compliance issues for plan sponsors and extra work for you as a TPA. That’s why, if you’re not already, you should consider talking to your clients and their financial professional about payroll integration. It can help streamline the process, making life easier for everyone involved. Here’s a quick overview of payroll integration to help you have consultative conversations—and position yourself as a valuable partner.
Types of 401(k) payroll integration
Payroll integration solutions typically fall into three categories: self-managed, 180°, and 360°. Which one you decide to suggest will depend on many factors, including how involved the plan sponsor wants to be in the process.
Self-managed payroll integration
Client profile |
The plan sponsor prefers to manage and submit 401(k) contributions in house—whether or not there’s a payroll vendor in place. |
How it works |
The client’s payroll staff handles the entire file maintenance and contribution remittance process using tools provided by the recordkeeper, typically through the plan sponsor website. |
Potential benefits |
The self-managed approach may work well for plans with limited turnover, new enrollees, deferral changes, and loans. |
Potential drawbacks |
The payroll files may not include nonparticipating and noneligible employees or they may lack full census data—both of which can affect plan administration. |
180° payroll integration
Client profile |
The plan sponsor prefers to outsource some 401(k) contribution processes. |
How it works |
The plan’s payroll vendor automatically generates and submits the necessary payroll and data files to the recordkeeper, while the client’s payroll staff manages the rest of the process in house. |
Potential benefits |
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Potential drawbacks |
The client still has to update deferral changes, new loans, and new enrollments in the payroll vendor’s system. |
360° payroll integration
Client profile |
The plan sponsor prefers to outsource a bigger portion of 401(k) contribution processes. |
How it works |
The client delegates the creation and submission of contribution files—and the ongoing upkeep of contribution payroll data—to the plan’s payroll vendor and recordkeeper. |
Potential benefits |
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Potential drawbacks |
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The role of payroll aggregators
For clients interested in 360° integration, you may want to discuss adding a payroll aggregation service to help address connectivity concerns. How does it work?
- The plan’s payroll vendor sends the payroll file to the aggregator.
- The aggregator translates the file into the recordkeeper’s required format and sends the file to them.
- After processing contributions, the recordkeeper sends a feedback file to the aggregator.
- The aggregator translates the file into the payroll vendor’s required format and sends the file to them.
Connectivity isn’t the only reason to consider a payroll aggregator. Consistent file formatting can also help expedite processing, reduce errors, and make plan administration easier.
If you’re not familiar with this service, consider reaching out to your network of plan consultants and financial professionals. It's likely that some of them work with aggregators and would be willing to share their experience and make introductions.
Creating your payroll integration strategy
Because of the potential benefits, you may be tempted to talk to all your clients about payroll integration. But it's important to be intentional and thoughtful in your approach. Focus on those sponsors who would potentially benefit the most—and for whom payroll integration would have the greatest impact on your ability to serve them effectively and efficiently.
To help you prioritize your list:
- Connect with your recordkeeping partners to understand their payroll capabilities and requirements.
- Segment your clients by recordkeeper, payroll vendor, participant counts, number of payroll submissions, and plan design.
- Identify which ones have persistent issues with incomplete data and late contributions.
- Collaborate with the plans’ financial professionals on the best way to bring up payroll integration.
Integrate payroll integration into your client conversations
The right payroll solution can help your clients avoid the compliance issues that come with late and inaccurate contribution submissions. And it can help make plan administration easier. So make sure this service is an integral part of your client meetings. It’s a simple but powerful way to help demonstrate your commitment—and make you a TPA of choice.
Important disclosures
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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