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Person checking a binder and calculator. Payroll and 401K.

Pros and Cons of Combining 401K Administration with Payroll Service

With all the ins and outs of financial planning and managing in a business it can be tricky to make sure every little detail gets attended to. When it comes to payroll,  you can engage a payroll software or you can outsource it all to a payroll service that not only provides payroll management services, but payroll tax services as well. So when it comes to your company’s 401K administration, it may seem like the easiest option to combine it with a payroll service. This isn’t always the best option for every company, however. Here’s a look at the pros and cons of combining 401K administrations with a payroll service. 

What are Payroll Services and 401K Administrations?

A payroll service is a third party company who takes care of the tax and employee payment aspects of your company. For small businesses in particular, this can be easier and cheaper than trying to do it yourself. A payroll service also frees up your time for things that require your personal touch, and does not require hours of training to make sure other leadership employees know how to use it too. 

A 401K administration is also a third party company, except instead of managing payroll services, they manage employee retirement plans. They ensure the employee gets the appropriate amount put into their 401K plan each week, to ensuring everything aligns with the IRS’s requirements, and everything in between. 

Pros of Combining Payroll and 401K

All of the paperwork that comes with 401K plans can be grueling and time consuming. Many business choose not to provide 401Ks for precisely this reason. Outsourcing it to the company that provides your payroll services can be a great way to provide extra benefits for employees without taking over large blocks of your time. Both of these services require detailed paperwork and constant care to avoid costly mistakes. It can ease an employer’s minds to know that employees’ deductions are made and invested with minimal effort. 

If you use a trustworthy, recognized payroll service, placing your 401K administration in their hands is generally a safe bet. Additionally, if you know your payroll service is providing the right kind of service for you, you can feel confident about adding the extra responsibility. Most importantly: no matter how big or small your business is, the third party administration you are using should know all the tiny little details that have to be managed for security in both paychecks and 401K plans, and that means you don’t have to worry about all those tiny little details. 

Cons of Combining Payroll and 401K

While all of these things may be true, combining your outsources may not be the best option. In fact, some experts maintain that payroll has very little to do with 401K plans, and should never be combined. It may be easy enough to combine payrolls and 401Ks, but it is more important to know that your 401K administration is dutiful rather than easy. 401K plans require a lot of careful management and have to meet very strict requirements. Just because your payroll service is great at payroll doesn’t mean they will be great at 401Ks. Also, many payroll services have a high client turnover rate -- meaning they may be getting a lot of new clients and plans, but they don’t tend to keep them. 

Other negative aspects of combining these services include difficulty finding someone to talk to through payroll services about 401K plans and the fact that payroll services doing 401K administration don’t tend to offer employees as many options when it comes to saving and investing. Furthermore, because this isn’t their specialty, they aren’t likely to be able to help you or your employees figure out the best way to manage their individual 401Ks. Many of them may not even try, as payroll services tend to be more straightforward and require less help to manage and utilize. Ultimately, you can combine the services, and it may be easier, but it may not be the best option for you, your company, or -- most importantly -- your employees. 

Last Updated: March 14, 2017