Summary: Professional Employer Organizations (PEOs) offer retirement plans as part of their comprehensive HR services to help small and medium-sized businesses provide competitive benefits to their employees. This article explores how PEO retirement plans work, their benefits, and key considerations for businesses.
PEO Retirement Plan
A Professional Employer Organization (PEO) is a co-employer service that assists small and medium-sized businesses through human resource management packages. This can include helping to manage payroll, taxes, employee benefits, and compliance with labor regulations. A retirement plan is a strategy for long-term saving that will provide financially for a person once their working life is completed. While individuals are free to make private investments and financial choices, it is common practice for businesses to offer retirement plans for employees; this can happen in the form of 401(k) plans, SIMPLE IRAs, or many other options.
A PEO retirement plan, therefore, is an employer-led retirement plan managed by a PEO, often in combination with a wider package of benefits. By including this as part of a PEO’s services, a business can effectively outsource responsibility and have its employees taken care of without needing to dedicate substantial core resources to the task. Working with a PEO, who is a specialist in this area, also helps ensure that any retirement plan is kept compliant with federal regulations such as the Employee Retirement Income Security Act (ERISA).
How Does a PEO Retirement Plan Work?
At its most basic, this arrangement works by the PEO, shouldering the majority of the responsibilities and tasks for running a retirement plan on behalf of the business for which it is a co-employer. The specifics vary depending on the type of plan, the size of the business, the individual agreement, and several other factors.
The PEO’s Role
As an experienced operator with extensive knowledge of the technicalities and legalities of retirement plans, the PEO’s role is to bring expertise, ensure regulatory compliance, and provide for workers while freeing its partner business to focus on core tasks and strategies.
Among the duties performed by a PEO are setting up and administering the plan, enrolling and educating employees, processing contritions, managing investments, and overseeing regulatory compliance while continually recording and reporting all processes and data.
Types of Plan
401(k) Plans
Used by a third of American workers, a 401(k) is a tax-advantaged retirement account into which employees are encouraged to make regular contributions from their salary. In some packages, employers offer to match any contributions made.
SIMPLE IRAs
Similar to a 401(k) but designed specifically for businesses with no more than 100 employees. These are less complex and easier to manage but obligate employers to make contributions, either as a fixed percentage of salaries or by matching those made by employees.
SEP IRAs (Simplified Employee Pension Plans)
Often favored by small businesses or self-employed people, a SEP IRA is a plan into which only the employer makes contributions. These types of plans allow for significantly higher contributions than most others.
3. Compliance Management
A key duty of PEOs when managing retirement plans is ensuring full legal and regulatory compliance. This means making certain every aspect adheres to federal and state laws and is in line with all terms of the business’ employment contracts. Areas of compliance management include following ERISA rules, completing required reporting and disclosures, testing for non-discrimination, and meeting fiduciary responsibilities.
Benefits of Offering a PEO Retirement Plan
There are several potential benefits of having a company’s retirement plan arranged and managed by a PEO. This is particularly true for smaller businesses that wish to offer employees the benefit of a plan but do not have the in-house resources to achieve this.
Among the most common benefits are:
1. Cost Savings
PEOs bring two key advantages to their partner businesses when it comes to the cost of running a retirement plan. Firstly, because the PEO is likely to be managing plans for multiple partner businesses as part of more comprehensive packages of service, it can spread the cost of administration across all those businesses and tasks, thus reducing the amount paid by each individual. Secondly, because the PEO represents a much larger number of employees and manages a much higher value of contributions, it is in a far stronger negotiating position when it comes to agreeing favorable terms and fees with investment services.
2. Enhanced Employee Benefits
This stronger negotiating position given to a PEO by the increased scale of its investments not only saves costs for its partner businesses but also improves the potential benefits to employees. Lower fees, increased investment options, and the incentive for employers who are paying less to contribute more all add up to more attractive plans for employees.
3. Enhanced Employee Benefits
The regulations for retirement plans in the US are complex and come with strict and severe consequences for non-compliance. Managing this in-house can require significant dedication of resources and invite serious risk to both the business and the individuals involved. As a specialist, a PEO is often much better placed to manage compliance, offering increased reassurance and minimizing the challenges involved.
Key Considerations When Choosing a PEO Retirement Plan
To gain the maximum benefits for both your business and your employees, it is important to work with the right PEO and choose the correct retirement plan. Different options will better suit different businesses depending on the details of the company, the preferences of the employees, and the costs involved.
Some key considerations when selecting a PEO and/or plan include:
1. Fees and Cost
As with any business decision, the costs involved in a PEO retirement plan should be fully evaluated before commencement and reevaluated throughout its lifetime. Plans and their management may be subject to administration fees, investment management fees, and the costs of management, enrollment, and employee education. The important thing is to ensure all costs, both upfront and long-term, are fully understood from the outset so a clear decision can be made with no surprises arriving later.
Read more about how the price of PEO services check out our PEO Pricing Guide.
2. Customization Options
While you can pick a retirement plan “off the shelf”, one-size-fits-all solutions are rarely the most effective. Before deciding to work with a particular PEO or standard retirement plan, it is wise to check what details can be customized. Can the investment options be chosen or changed? Can the levels of employer contributions be adjusted? Are the vesting schedules flexible? A PEO retirement plan is not something a business should “make do” with but should be tailored to fit the company and its employees as well as possible.
3. Ongoing Flexibility
As well as customizing the initial package, allowing ongoing flexibility can also be beneficial to a business that cannot predict how its circumstances and needs, or those of its employees, may change in future. Before adopting a plan, it is important to determine whether the contributions of both the employees and the employers can be later adjusted to allow for things such as cash flow fluctuations, incentives, or other unforeseen circumstances.
How PEO Retirement Plans Improve Employee Retention
While having a strong employee retirement plan in place can be an advantage to the individuals it serves, operating such a benefit is not purely altruistic. It is also a significant factor in generating employee satisfaction and, therefore, helping to attract and retain the best talent at the most cost-effective rate for the longest period possible. Being able to provide a better retirement plan through a PEO can give a business a significant competitive advantage in its recruitment.
An effective PEO retirement plan helps improve employee retention by preventing salary from being the only financial measure by which workers choose between opportunities. If a retirement plan offers a more secure future, it may tempt the best talent away from competitors who can provide higher short-term compensation. Similarly, a worker who feels they are investing in their future is more likely to feel satisfied with their employment and loyal to a company that has a plan in place for their long-term support.
An employee who believes they might be able to find a better deal for their retirement is far more likely to look for other opportunities than one who feels secure that their future is in safe hands.
PEO vs. In-House Retirement Plans
Choosing whether to manage an employee retirement plan in-house or outsource it to a PEO is a big decision. What option is right for one business may be different from what is right for another. Several key factors to consider when selecting the right path include:
1. Administrative Burden v Control
Managing a retirement plan comes with a significant administrative burden. If conducted in-house, this could mean diverting resources from other areas of the business or increasing headcount and, therefore, costs. Working with a PEO means outsourcing the bulk of this burden. However, as with any third-party arrangement, it also means surrendering an element of control as the business relies on the PEO’s efficiencies.
2. Cost and Compliance
A PEO does not work for free, so there is always an additional cost in having one manage a retirement plan or perform any other function on behalf of a business. This, however, should always be balanced against the cost of administering a plan in-house, especially if it requires hiring additional employees and installing new infrastructure or technology. Similarly, as a specialist, a PEO should be far better placed to ensure compliance with all regulatory requirements. However, this is only effective if the PEO performs to the level expected, and it may be important to consider if bringing an expert team in-house would offer more control and reassurances or a reduction in cost.
3. Flexibility of Offerings
As mentioned earlier, having a plan that is customizable and flexible can be a significant benefit to both a business and its employees. With this in mind, it is important to determine what flexibility can be offered in-house and if this allows greater control, or if the higher level of experience and stronger bargaining power of a PEO will provide greater flexibility and enhanced opportunities.
Legal and Compliance Considerations
In order to protect both the business itself and all employees’ retirement savings, legal and regulatory compliance must be maintained throughout every element and operation of a retirement plan.
This includes adherence to the minimum standards set by ERISA relating to benefit accrual, participation, and vesting. When a PEO is managing a plan, it also assumes fiduciary responsibility, meaning it must act in the best interests of the plan’s participants, ensuring it invests wisely and charges only reasonable fees. Finally, any plan manager is responsible for ensuring compliance with other applicable legal frameworks, such as Department of Labor (DOL) regulations and the Internal Revenue Code (IRC).
When a PEO agrees to administer a retirement plan, it also accepts liability for compliance in all these matters, including filing reports and recording data as well as supporting any compliance checks or audits that are required.
Get the Best Retirement Plans for your Team with a PEO
PEO retirement plans can offer an ideal solution for businesses wishing to provide secure benefits for employees’ future without shouldering the entire burden of administration and legal compliance. This is particularly useful for small to medium-sized businesses in which resources may be limited, or those that have little experience or knowledge in this area.
By working with a reputable PEO, a business can ensure it provides for its workers, increases its ability to attract and retain talent, and minimizes the risks of facing consequences for non-compliance.
For more information on which PEOs can offer the best retirement plans, check out our Best PEO Guide. For an in-depth consultation on PEO services talk to our PEO broker consultation service.
Authors:
Marcel is an experienced journalist and Public Relations expert with an honours degree in Journalism and bylines with a range of major brands.