Fluent in Fiduciary

360 Degrees of Integration: Reasons to Simplify your Payroll Processes

Wearing too many hats? Simplify payroll processes.

Are you familiar with the reasons why you should simplify your payroll processes? Anyone who has worked in a small or mid-size business knows that it’s common for employees to wear different hats at different times. This is especially true for those workers who are responsible for the management and oversight of a small company’s retirement benefits plan.

A plan administrator can find himself or herself doing different jobs at any given time—one minute, they may act as a Chief Investment Officer when evaluating fund performance, then switch to being an accountant when overseeing payroll deductions, then transform into an attorney when reviewing plan documents.

If this wasn’t hard enough, plan administrators also must fulfill their duties with the utmost attention to detail, to keep the plan compliant with current regulations.

While a fair number of individuals don these different hats effectively and do so without complaint, there remains a possibility of human error and unintended consequences that business owners and plan sponsors can’t ignore. One way plans sponsors can try to minimize the potential for errors is to look for efficiencies from automation from third-party service providers.

 

The Human Touch

Plan sponsors typically encounter problems in two key areas: first, when enrolling employees when they are first eligible; and second, when processing payroll contributions in a timely and accurate manner.

Let’s look specifically at payroll processing because it is such an important task for a plan sponsor to get right. Plus, this is an area that ripe for automation, simplifying the management of participant contributions and reducing the likelihood of errors.

There are four ways payroll contributions are typically processed. First, plan sponsors can follow a manual entry approach—entering data for each employee’s payroll contribution by hand into the plan provider’s web site. This is, of course, very time-consuming and labor-intensive. We don’t recommend manual entry—the potential for human error is too great.

Then, there’s the template method, which is the method we see most commonly used among small and mid-size businesses. A recordkeeping company provides a template for the plan sponsor to collect all the data necessary to record employee contributions for each payroll period.

The template is completed by the plan sponsor and transmitted to the recordkeeper on a regular schedule. It also takes some of the work load off the plan sponsor’s shoulders. But there’s still a human element involved—the plan sponsor is responsible for managing changes to the template, including adding or removing participants, increasing or reducing contribution levels, and more.

Templates can be an affordable solution for small plan sponsors, but they are only as effective as the quality of the data. Whenever a human element is involved, there is always a possibility of error. That’s why this important part of plan administration is a good place to implement an integrated solution.

 

Integrate to Automate

Now let’s look at two more automated solutions. The first is called 180° integration—the plan sponsor’s payroll provider and 401(k) recordkeeper are integrated to share critical information on participant contributions. Data flows automatically from payroll to the recordkeeper, but only in one direction.

Integrating your payroll and recordkeeping providers essentially replace the need for a template. And because participant data are shared automatically, there is less need for human interaction so the potential for errors can be reduced.

A plan sponsor could choose 360° integration—that’s where data flows in both directions between the payroll firm and the 401(k) recordkeeper. Why choose two-way integration? Because it would automate all aspects of contribution processing, including changes participants make on the plan provider’s website to adjust their contribution levels. With 180° integration, these changes would have to be done manually.

So why wouldn’t all plan sponsors choose 360° integration? Primarily because of the cost. It makes sense only for the largest plans with hundreds or thousands of participants to manage and monitor. For plans of small and mid-size businesses, 360° integration is just too costly. 180° integration would work just fine in many cases, as long as the costs wouldn’t add excessively to the recordkeeping fees paid by plan participants.

 

Cost Versus Value

Even for small-company retirement plans, some level of automation can be a worthwhile investment, if only for the reduction in workload and the potential for human error it can provide.

Templates offer a simple and effective way for many small-sized plans to automate their payroll contribution processes. 180° integration would be a more ideal—it’s closer to true automation and error-free processing—but only if the costs are suitable for the plan sponsor and participants.

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