Retirement savings have grown significantly in the United States. According to data from the Investment Company Institute (ICI), as of March 2021, there were 106 million participants in 401(k) plans in the United States, with total assets of $6.7 trillion.

This growth can be attributed to several factors, including the increasing popularity of defined contribution plans over traditional defined benefit plans, the widespread adoption of automatic enrollment features, and the ongoing shift towards self-directed retirement savings.

For employers, 401(k) plans help attract talent, lower turnover, and provide tax benefits for employees and the company. Get insights into administration roles and challenges that can help you build a strong, smooth functioning 401(k) plan that serves your business and its employees.

401(k) Administration: Key Members and Systems

There are four key components in 401(k) administration:

• Plan administrators oversee the 401(k) plan’s day-to-day operations, including recordkeeping, compliance, and reporting at the company. They work closely with third-party service providers, such as recordkeepers, custodians, and investment managers, to see that the plan is operating efficiently and complies with all applicable laws and regulations.
• Plan participants are the employees who contribute to the 401(k) plan and receive benefits from it. They work with plan administrators and third-party service providers to verify that their contributions are properly recorded and invested. Plan participants are responsible for managing their own retirement savings, including selecting investment options, and monitoring account balances.
• Third-party service providers are financial institutions that provide services to the plan, such as recordkeeping, custodial, or administrative services. They also offer investment options that plan participants can use. Third-party service providers work closely with plan administrators to see that the plan is operating smoothly and that participants receive the services they need.
• Payroll and HR systems at the company are also critical to a 401(k) plan’s success. Payroll systems deduct contributions from employees' paychecks and remit those contributions to the plan. HR systems also manage employee data, such as employment status and salary information, which is used to determine eligibility for the plan and to calculate contributions.

401(k) Administration Challenges

The interplay between these administration parties is critical to the success of a 401(k) plan. Plan administrators and third-party service providers rely on accurate data from payroll and HR systems to make sure contributions are being properly recorded and invested. Plan participants rely on the administration parties to provide tools and information needed to manage retirement savings effectively.

Plan administrators use a variety of tools to make sure the data is as accurate as possible. While companies initially can research issues or conduct data audits through Excel or other manual methods, several factors can make those solutions infeasible in the long term which can expose a company to compliance issues and unneeded risk.

Employee Growth

While company growth is an overall benefit, it can render existing processes ineffectual depending on how quickly the growth occurs. Companies experiencing rapid growth in their employee base can see existing audits in Excel take longer and longer. These delays expose companies to more audit misses which requires manual efforts to mitigate errors and anomalies.

Plan Changes

New features or plan amendments can also make existing processes obsolete or require rework. For example, a company that amends plan documents to allow employees an after-tax contributions option and handle CARES Act loans could require a process review, a software solution, or the need to move to a new provider.

Switching Providers

Converting from one to provider to another may upend existing processes as the formats from the reports change and delivery of data between company and provider changes. There may be new systems or processes that are introduced by the provider that will need to be integrated with payroll and HR to continue operating the 401(k) plan.

Data Errors and Employee Experience

Issues in the data can result in errors that affect not only your employees’ pay checks but may also require your company to list the failures on the Form 5500 or pay out missed contributions or fines to those employees. Frequent data validations can reduce unneeded financial risk and ensures that your employee base has a smooth experience interacting with their 401(k) benefit.

System Limitations

As your company grows and employee base expands, you may encounter constraints between your provider, payroll, and HR systems as the volume of data increases. A company that has several payrolls and pay groups with information that must be transmitted to payroll during specific intervals experiences more challenges as the number of employees in those pay groups grows.

Next Steps

Ongoing evaluations of your current 401(k) operations—around all touch points of your systems—with assessments that review your existing processes within your organization can uncover what’s working well and what can be improved. Collaborating closely with 401(k) professionals can create documentation that identifies improvement areas.

We’re Here to Help

To address gaps in your company’s 401(k) plan administration or implement plan-strengthening protocols, contact your Moss Adams professional.

Additional Resources

• Development & Integration Consulting Services
• 401(k) Systems Assessments Services