Loading...

​​What is a 401(k) plan? 

​​There are 5 services that all 401(k) plans need:

​​Record-keeping: keeping track of contributions, investments, rollovers, etc. for each employee.

​​What does this mean?

​​A record-keeping system tracks which employees own which assets. This sounds simple: Charlotte puts $200 into her 401(k), so she has $200. That’s it, done! Unfortunately, reality is more complicated.  

​​

​​There are a few things that need to be tracked before and after:

1. ​​How much does each employee wants to contribute from their paycheck?

2. ​​How much will the company match?

3. ​​What does she invest in?

4. ​​Oh no! Let’s make sure she doesn’t go over the IRS limits 

5. ​​What about rollovers?

6. ​​Lots more! 

​​

​​Because plan assets are stored in pooled accounts, the record-keeper also keeps track of each employee’s ownership of the plan assets. Distilled down, if you have a 401(k), the company behind the website where you login to check your account balance, change contributions, and change what you are invested in is likely the record-keeper. 

​​

​​As you can predict, record-keepers are usually accounting firms. Their systems must communicate with payroll systems (explained in the next section) and custodians (defined later). Currently, the vast majority of them are terrible at syncing with payroll providers. 

​​What does Vest do?

​​At Vest, our goal is to normalize all of the payroll data. When an employee makes changes to contribution rates or fund choices, we must make sure those changes are communicated to the record-keeping system. At the end of every month, the record-keeper will issue statements, and it’s our responsibility to reorganize that information into a more meaningful outline.

​​

​​When picking a record-keeper, there are 2 requirements: 

• ​​Their technology must be up to date

• ​​Charge flat-fees instead of AUM 

​​What does Vest need to do?

​​We are working on becoming a record-keeper. 

​​

​​Our goal is to eliminate middlemen. There are many payroll providers opening up. We should bet on one of these or use an existing, large one by investing more time customizing our syncing with them. By doing this, we get a distribution channel which is great. However, more importantly, we can get a better handle on the technology aspects and eventually build our own system for the provider, thus creating a closer partnership. The first step in this process is getting access to all of their open APIs. 

​​Plan admin: syncing with payroll, enrolling new employees, and daily running of the plan.

​​What does this mean?

​​Plan admin is really the day-to-day running of the plan. This includes syncing with payroll, sending notices to employees, maintaining all the plan documents, enrolling new employees, and employee education.

​​

​​Probably the biggest snarl is payroll syncing. When an employee changes their contribution settings in the record-keeping system, the company’s payroll system needs to know how much to withhold from each paycheck. Sadly, payroll systems and record-keeping systems don’t talk to each other.

​​

​​In nearly all 401(k) plans there is a human who runs reports and manually shares data between the payroll system and the record-keeping system. It’s crappy, tedious, error-prone work. And it is work that often falls on the shoulders of someone in HR or Finance at your company. Some newer providers, including Vest, have automated payroll sync to eliminate this work. But by and large there is a human toiling in a spreadsheet checking for errors on each payroll. No bueno.

​​

​​On the employee education front, when new employees becomes eligible for the 401(k), the bare minimum they are required to receive is a packet of documents explaining the plan details. But for most employees, receiving these dry, not-very-easy-to-read documents doesn’t really tell them what they need to do. Employees will have questions like: What is a 401(k)? Why should I contribute? How much should I contribute? What is the difference between traditional and Roth contributions? Fielding these questions is often the responsibility of someone in your company.

​​

​​Of all the 401(k) services, plan admin is most often done by someone at your company rather than a 3rd party. 

​​What does Vest do?

​​We sync with payroll and are in charge of employee education. For payroll, we currently sync with ADP and Paychex. 

​​

​​On the education side, we have created a knowledge database of the commonly asked questions.

​​What does Vest need to do?

​​We need to take the knowledge database and convert the information into a format that is easier to digest. 2 areas we are currently testing are a chatbot and Medium Series. Additionally, we are in the process of plotting out all of our customer support details as to decrease call rates. The model we’re basing it off of is Wufoo. 

​​Third-party administration: staying compliant, form preparation, document creation, and preparing annual government filings.

​​The third-party administration (TPA) boils down to preparation of all the documents surrounding the 401(k) plan and making sure the plan stays IRS compliant.

​​

​​At the beginning, the TPA will help you design the plan, fill out the paperwork to get it going, and create those documents explaining the plan to your employees. During plan operation, if there are loans or withdrawals, the TPA will prepare the required paperwork. At the end of the year the TPA runs tests to make sure your plan is IRS compliant, and will then fill out (or help you fill out) IRS Form 5500.

​​

​​TPA services are most often done by a provider. They can be done by your company internally, but TPA work requires you to have knowledge of government rules and processes, and keep up with changes. Some TPAs will offer to be a 3(16) fiduciary for you plan and charge you extra. In a later post I will explain why this is unnecessary, especially with the payroll integration that 401(k) providers like us offer.