Noted ERISA attorney Ary Rosenbaum lays out arguments why 401k plan sponsors should be careful about hiring their payroll vendor to also administer their 401k plan. It should be note that over 100,000 plans, and growing quickly, do use their payroll vendor to run their 401k plan and that attorney Rosenbaum comes from the more customized, smaller TPA world. In addition, many of the cautions about payroll vendors apply to other high volume, small market, bundled record keepers. But the issues raised are nevertheless worth considering.
Before we review, let’s point out the difference between a bundled and unbundled 401k arrangement. In the unbundled model, a local independent TPA partners with a national record keeper; in the bundled model, used by larger payroll vendor, the record keeper does the administration in house. Of the almost 4,000 retirement TPAs, less than 600 also do record keeping which is a hybrid between bundled and unbundled.
So what are Mr. Rosenbaum’s concern about 401k payroll vendors?
• Payroll has little to do with running a 401k plan. Sure, payroll integration is important but almost all 401k record keepers working with payroll companies are integrated. Compared with investments, Rosenbaum argues, and other more related technical services, payroll integration is not that important.
• Volume means less handholding and could mean more errors. Profits for record keepers come from volume which means relatively low levels of service which is true for any large bundled record keeper. Rosenbaum argues that payroll vendor have the highest level of personnel turnover – certainly plan turnover tends to be higher.
• Vanilla plans – it’s difficult if not impossible to get complicated plan types like cross tested plans which is also true for other large bundled record keepers.
• Firing your payroll company as your 401k vendor may disrupt your payroll relationship.
Most payroll vendors service smaller plans but one in particular has moved up market providing higher levels of service. For many plan sponsors, the simplicity and low cost of a payroll provider running their 401k plan makes sense but, just because a company does your payroll does not mean you should hire them for your 401k unless you conduct the proper due diligence. And, of course, consider attorney Rosenbaum’s points.
