There were three plan features I thought were going to become increasingly more prevalent in the future: individually managed accounts, distribution planning help, and greater integration of payroll and 401(k) administration.
While plan sponsors increasingly are looking at the first two to help participants, it's the third one that's getting more currency (pardon the pun) in the marketplace.
Integration of a plan sponsor's payroll processing with 401(k) administration can, at the very least, streamline employee contribution processing by directly linking with the 401(k) provider.
Employers have two types of payroll systems available: doing it themselves or outsourcing. Most small- to mid-sized employers outsource their payroll for reasons of convenience, compliance, confidentially and, usually, cost savings.
Indeed, outsourcing is a huge business in the United States. Payroll processing, together with electronic payment processing and health care transaction processing, is part of what's referred to as "data and payment-related transaction outsourcing."
In 2008 this sourcing industry had sales of $62 billion and is forecast to grow at a 9% to 10% rate over the next five years.
The payroll space that used be dominated by the Big Three - ADP, Paychex and Ceridian - now is being invaded by a number of local, regional and national payroll processors who are using newer web-based technology to win a larger market share.
Much of their growth is fueled by strategic alliances with plan administrators, recordkeepers and benefit advisers who see the opportunities to add value to clients.
Control and access
So where exactly do the efficiencies - and cost savings - come from? It boils down to two essential elements that drive plan administration: the employer's control over census information and the plan administrator's access to the data.
In the unconnected world of payroll processing and 401(k) administration, there are a multitude of steps that need to be done in order to get the employee's 401(k) contribution into the 401(k) recordkeeper's platform. Such steps could include at least these four:
1. A new employee is entered into the payroll system.
2. The 401(k) contribution file - which can include pretax contributions, Roth after-tax contributions and loan repayments - is sent to the 401(k) recordkeeper.
3. Funds are transferred from the employer's bank account to the 401(k) investments.
4. The recordkeeper reconciles the amounts, and allocates the contribution amounts and sources to the respective participant accounts.
With an integrated system, all of this takes place electronically, and the employer is removed as the middleman. For firms that do plan administration, i.e., compliance testing, access to the data can make the 401(k) plan run more efficiently.
For example, 401(k) discrimination testing can be completed following the end of the plan year. It also means that midyear compliance testing can be done on the same basis, thus alerting highly compensated employees to any possibility of having excess contributions returned.
The efficiencies also can translate into dealing with not uncommon situations in which data has to be tracked and retrieved. For example:
* The plan year is not a calendar year. If the plan year is July 1 through June 30, for example, compensation has to be tracked for testing and allocation purposes on a plan year basis, while employee deferrals limits are on a calendar year basis.
* The definition of compensation can be based on one of several IRS definitions. This would require that "compensation" for plan purposes isn't necessarily the same as regular payroll reporting.
This discussion of connecting the dots between payroll processing and 401(k) administration is, by necessity, brief. In the real world, this integration can be robust with other HR applications, such as automatic enrollment in benefit programs and compliance with employment law reporting.
Contributing Editor Jerry Kalish is the founder of The Retirement Plan Blog and president of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm.