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The Pros and Cons of Connecting a Retirement Plan to a Payroll System

October 6th, 2023 | 6 min. read

By Mike Shaeffer

Who doesn’t love a good buzzword? In my world, “integration” is a big buzzword that gets thrown around as a way to simplify life, improve performance, and fulfill all your hopes and dreams! ...Okay, maybe it isn’t that extreme, but it is presented in terms that often make me think is it too good to be true. 

One area where integration is a big talking point is around retirement plans. More specifically, with record keepers. The retirement plan record keeper is where money is kept, and it is the providers responsible for keeping up with every dollar that belongs to the individuals contributing to the plan. For many companies, having a connection between the record keeper and their payroll system, which is normally the system that calculates contributions for each employee, can be a real benefit. But is that always the case? In this article, we will explore some of the upsides and downsides of creating an integration between these two systems. 

The Benefits of Integrating Your Record Keeping and Payroll 

Employee Engagement 

Why does a company feel it is important to offer a retirement plan? Typically, I see the answer as a mix of maximizing an owner's tax situation through a deferred compensation plan and bringing an incredible benefit to employees. At Whirks, I often talk to my team about the advantages of investing in their future through retirement contributions. The math is simple; if you want to retire as a millionaire, start investing in your retirement plan early and consistently throughout your career! It may not seem obvious, but a connection between your retirement provider, specifically the record keeper, and your payroll system increases the likelihood that an employee will participate in the plan. Why is this? 

Let’s face it, to some extent we are all a little lazy! The path of least resistance is a path that is well traveled. This isn’t groundbreaking insight; it is the same reason why the grocery store has candy bars on the checkout counter. They know how easy it is to reach over and grab that Snickers bar, especially if one of my kids has decided to throw a fit over their lack of candy bar intake. Wouldn’t it make sense for employers to utilize the same logic for the betterment of their teams? How easy is it for a new hire to join the retirement plan? Are there mounds of paperwork that must be completed? Is it simple to adjust the contribution from time to time? Even worse, does a person have to go into multiple systems to adjust the same thing? Ideally, the answer is no. 

Integrating your payroll system and your retirement provider is just one way to improve your employee experience. Imagine that you only have one spot to manage all the information you are responsible for as an employee. You tell the payroll department that you want to contribute 5% of your pay to retirement and that automatically feeds over to the retirement provider, and presto! You are now participating in a retirement plan. 

More Accurate Data Through Automation

Careless mistakes suck! I’m not immune to periodic misspellings, typos, or fat-fingering errors, and neither are you. Most of the time, small errors do not cause big issues, but in the world of retirement plans, that isn’t always the case. A company’s retirement plan is governed by ERISA (Employee Retirement Income Security Act of 1974), which is a federal law that establishes standards for voluntarily established retirement plans. The goal is to provide protection to individuals contributing to the plan from mismanagement and abuse. ERISA provides strict standards on how a plan must be administered, who can participate, how they can participate, how often changes can be made, and a slew of other requirements. Any time an error is made, whether that is forgetting to fund employee contributions or disallowing an eligible employee from participating, it is possibly an ERISA violation that comes with penalties, some of which are severe.  

As we have discussed at length in a variety of other articles, automation has the ability to reduce errors simply from the closed data loop that is created. Remember when you used to play telephone? One person would say a word or phrase to the person next to them, that person would tell the person next to them, and so on and so on before it would get to the last person and the original word or phrase now sounds like something completely different. That wouldn’t be the case and wouldn’t be as much fun if the first person simply told the last person the phrase! In the world of retirement plans, let’s shoot for data accuracy and leave the fun of telephone to the games we play. 

Time-Saving Efficiency 

The most obvious gain of having an integration between retirement and payroll is found in the efficiency gained by eliminating manual tasks. No longer does a person in the HR or finance team need to pull data out of the payroll system and key it back into the retirement provider's systems. The ability to move data without intervention will cut back on time spent throughout the year managing disparate systems. From payroll contributions to census files, eliminating work only makes everyone happier! 

The Drawbacks of An Integration With Your Payroll System 

The Costs of Integratioin

The number one objection I hear to connecting systems is around costs. Cost is an important consideration, but with the rise of technology over the past couple of decades, it may be more affordable to connect systems than you realize. In our office at Whirks, this type of connection only costs about $50 per month. That is relatively affordable, especially when compared to the time spent doing the manual tasks plus the increased risks of errors, not to mention the redundancy of personnel that is likely needed for cross-training. Even if your payroll/finance/HR team is only one person and this is a small portion of their overall tasks list, it is often a better investment to have that person focus their energies on something other than managing data in multiple systems.  

Compatibility Issues 

What if your current payroll system isn’t friendly with your record keeper? This may be one of the larger drawbacks that prevent companies from connecting systems. If you only have a square peg and a round hole, you are limited in your ability to make things work. If attaining an integration is important to you, you must be intentional in your discovery process when evaluating the technology tools you plan to use. It may even mean being willing to move your payroll systems or retirement plan to a different provider that does have compatible features. 

Training and Maintenance

At Whirks, one of the things we are notorious for with our team is our ability to roll out a new “thing” with very limited training on what it is, what it is for, how it makes life better, or even what our expectations are. I wish this wasn’t the case, and it is something we need to do better, but I don’t think we are much different than many small businesses. When an opportunity arises, we are quick to action, and we’ll figure out the disruption it causes as we go. While starting to connect your retirement providers and payroll systems isn’t a big project, it is big enough that everyone who touches either of those platforms is aware of what is involved and how it changes their day-to-day.  

If you are using an outsourced payroll provider, you will get some guidance on what this process looks like and the exact steps that are necessary to get the ball rolling (assuming your outsourced payroll provider supports an integration). Here at Whirks, this starts with an introductory email or call where we get connected to our clients’ Record Keeper. From there, we get a template of how data needs to be formatted, which we build in our system, and begin a few rounds of testing where data is sent back and forth to ensure everything is formatted and fed correctly between the systems. Normally this takes a few weeks, but occasionally, it can take months depending on the complexity of the build. While we try to take on the burden of a connection as much as we can, there are some components of the build that our clients are involved in. For example, if an employee has a birth date that is different in the two systems, I need the client to reach out to the employee to see which birth date is correct and make the necessary adjustments in the appropriate system. 

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While it would be awesome to say that connecting the retirement plan and payroll system is a hands-off process, that simply isn’t the case. It can be a time-saver and simplify your processes, but there is an initial investment of time and resources to make it happen. It's important to evaluate the pros and cons for your specific business before jumping in. 

The Decision to Integrate Your Retirement Plan

So, where do you land? Is it worth your time and energy to begin working towards connecting your payroll system and your retirement plan? Maybe you feel that the project is too big of a headache for the benefit? If you are looking for a bottom-line recommendation, I would say that go for it! At Whirks, we believe in getting one step better every day and this is a tangible way to improve your back-office tech processes for both you and your employees.  

Feeling unsure of how to get started? Schedule a call with us to start the conversation. Looking for an answer that will relieve your team of even more of the administrative burden? Check out our benefits administration offering “The Whirks” to learn how we can be your broker, payroll provider, AND administrator.