Why You Should Use A 3rd Party for 401k Plans

Besides profit and KPIs, another essential part of business is your employees and their retirement benefits, especially 401ks. Employees are the driving force behind your business, so ensuring they have access to benefits is crucial to raising longevity and overall morale. The benefit we’d like to discuss now is a 401k.

401ks: Define and Conquer

There are a lot of retirement options, so let’s start with the definition of what a 401k is: “A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years” per Investopedia.

There are two types of 401k: Roth and traditional. In short, Roth 401 contributions are post-tax, meaning taxes are taken out after the net pay, while Traditional is pre-tax, so the contributions are straight out of your gross wages.

Now that we’ve covered a fundamental definition of 401k, we want to discuss a couple of different solutions and what we have found over years of working with clients to be not necessarily the easiest or cheapest but what has worked well for the long run of the business.

Administering retirement plans is a significant cost that concerns employers. It’s expensive, and we understand that, but you have many options for handling that expense. However, it is required for legal and tax purposes. Many tasks need to be completed for compliancy, so ensuring the accuracy and timeliness of the administrative parts of the 401k is crucial.

Retirement Solutions

Guideline – A Simple Solution

A couple of major payroll software companies utilize Guideline for their retirement management. QuickBooks and Gusto recommend or work with Gusto. The Guideline software has simplified the retirement process by allowing pre-packaged plans so that it won’t be highly tailored to your specific employees.

At first, you may look at this as a downside, but in the long run, it will help save time because you can avoid having to create documents and ensure the legality of your plans. Guideline saves you money but limits the customization of the plans available to your employees.

ADP – Empower, Employee Forward

ADP is a company that Waterford enjoys pairing with for payroll solutions; however, after we have personally reviewed their 401k options, they do not outpace or outmark the funds and investment returns that we have seen with an independent 3rd party. They have a very user-friendly portal for employees and great financial tools within that portal, but the investment returns are something that you will want to research for yourself before signing up with ADP. It is a cheaper employer option, but you must weigh the pros and cons.

Independent 3rd Party – Recommended Solution

Waterford recommends working with a third-party administrator. A third-party administrator is when you work with a company that works specifically with 401k. They will cover all the admin and compliance work, including forms that must be completed annually.

Signs of a good independent third-party administrator, or TPA, would be in the initial consultation. They should specifically explain what a 401k is, your costs, and any annual requirements. Understanding what you are truly paying for and getting out of the 401k is crucial. The TPA will likely be partnering with a financial advisor, so you can review not only the company’s best interests but also who can assist with the employee’s investment and financial goals.

Another positive of having a TPA is the communication channels. For TPA, you will have direct contact with an e-mail for one-on-one conversations. The software options will have more of a customer service line for all your adjustments, which could lead to delays in canceling employee policies. This contact also helps with any compliance audits or legal notices, so they can manage those for you and fight on the companies’ behalf.

Questions You Should Ask or Be Asked

What other businesses do you own?

Do we have an interrelated company issue in which you will have to offer the same benefits across multiple companies?

Does this plan make sense for the company’s financial standing?

Are there children who may want to invest in the 401k?

What kind of vesting schedule do you want?

What is the profit share, or how much do you want to split or give back to the employees?

Do you want straight percentages or half percentages? Are we doing employer match? What will the employer offer?

This is not a comprehensive list, but it is a great start for someone who is setting up a 401k for the first time.

If you were looking at starting a 401k for 2025, it is already June. If you are trying to get a 401k, you must be set up and finalized by October. If you use a box option with the pre-packaged plans, it takes about a week.

Pre-packaged plan means your 401k could be up and running within a month. If you use a TPA, the onboarding will take longer as the package will be customizable. Ensuring the setup is done correctly and accurately in the first place is extremely important because modifying the plan later will be more complex.

Another long-term benefit of the TPA is having that contact who ensures that your business is set up correctly in the first place instead of having to modify it later. They will cost more for set-up but will save you headaches.

Tax Advantages and Credits for 401ks

401k Tax Credits for businesses can be claimed for 3 to 5 years to help recoup some start-up and management costs. It’s a one-for-one reduction in your taxable income, so it will help cover those increased costs if you choose a more expensive 401k solution.

As always, Waterford is here to help with knowledge and guidance. If you’re looking for a TPA and don’t know where to start, you can always reach out to us at 864-351-0852 or by email at info@waterfordbusiness.com. We offer many services, including bookkeeping, clean-up services, and taxes. We don’t stop there, though; we have payroll add-ons to our services, which can include comparing software for your business’s best options.