401(k) Recordkeepers

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Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 08, 2023

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What Are 401(k) Recordkeepers?

401(k) recordkeepers are entities that handle the administrative duties associated with 401(k) plans. They maintain detailed, participant-level records for 401(k) plans, ensuring the accuracy of data pertaining to each plan participant.

This includes tracking contributions, distributions, loan repayments, and investment selections.

The importance of recordkeepers cannot be overstated. They ensure that all transactions, such as employee contributions and employer matches, are properly recorded, allocated, and reported.

Additionally, they manage the investment options within the plan, execute trades at the direction of participants, and track investment gains and losses.

They also provide essential services like processing loans, hardship withdrawals, and handling distributions when a participant leaves the company or retires.

How 401(k) Recordkeepers Function

Participant in Record Keeping

At the heart of recordkeeping is maintaining accurate, up-to-date records for each plan participant. This includes personal information, beneficiary designations, contribution rates, investment choices, and account balances.

Recordkeepers often provide online platforms where participants can manage their accounts.

Track Contributions

Recordkeepers meticulously track contributions made to the plan. This includes pre-tax and Roth contributions from employees, employer matching contributions, and any profit-sharing contributions.

They ensure these are allocated to the right accounts and invested according to the participants' directions.

Investment Management

Recordkeepers administer the investment lineup of the plan, executing trades as directed by participants. They track the performance of these investments and update account balances accordingly.

Provide Necessary Reporting and Testing

401(k) plans are subject to complex regulations. Recordkeepers help ensure compliance by providing necessary reporting and testing.

This includes nondiscrimination testing to ensure the plan does not overly favor highly compensated employees.

Participants in Communication

Recordkeepers often provide essential communication services. They may send out legally required disclosures, annual statements, and other plan-related communications. They also may provide resources to help participants make informed decisions about their accounts.

Function of 401(k) Recordkeepers

Roles of Various Entities in 401(k) Recordkeeping

Role of the Employer

The employer is the plan sponsor and has the ultimate responsibility for the plan's operation and compliance.

They select the recordkeeper and other service providers, decide the plan's design and investment lineup, and are responsible for contributing any employer match or profit-sharing contributions.

Role of the Recordkeeper

As discussed, the recordkeeper handles the day-to-day administration of the plan. While they provide essential services, they do not make strategic decisions about the plan's design or investment options; those responsibilities lie with the employer.

Role of the Financial Advisor

Financial advisors may help employers design their plans and select the investment lineup. They can also provide advice to participants, helping them make decisions about contribution rates and investment selections.

Role of the Plan Auditor

If a plan has 100 or more participants, it usually needs an annual audit by a qualified CPA. The auditor ensures that the plan's operations comply with federal regulations and that the financial statements are accurate. The recordkeeper will provide the necessary data for the audit.

Roles of Various Entities in 401(k) Recordkeeping

Benefits of Professional 401(k) Recordkeepers

Precise and Timely Report

Professional recordkeepers have systems in place to ensure accurate, timely recordkeeping. This helps prevent errors that could lead to compliance issues or financial losses for participants.

Compliance Assurance

401(k) plans are subject to numerous laws and regulations. Failure to comply can result in significant penalties. Recordkeepers understand these requirements and provide services to help ensure compliance.

Streamlined Processes and Reduced Administrative Burden

Professional recordkeepers can streamline administrative processes, making life easier for employers and participants.

They can automate many tasks, reducing the time and resources employers need to devote to plan administration.

Employee Education and Support

Many recordkeepers provide tools and resources to help employees understand their 401(k) and make informed decisions.

They may offer online calculators, educational articles, webinars, or even one-on-one consultations with financial advisors.

Drawbacks of 401(k) Recordkeepers

Cost Implications

Recordkeeping services come at a cost, which is usually paid from plan assets. High recordkeeping fees can erode participants' retirement savings over time.

Potential for Errors if Not Managed Correctly

If the recordkeeper makes mistakes, it can lead to compliance issues or financial losses for participants. Employers need to monitor their recordkeeper's performance to ensure they are doing their job correctly.

Dependence on the Recordkeeper's Technology

Most recordkeeping is done digitally. If the recordkeeper's technology is outdated or unreliable, it can lead to errors and inefficiencies. It can also make it difficult for participants to manage their accounts.

Communication Challenges

Effective communication between the recordkeeper, employer, and participants is essential. If the recordkeeper does not provide clear, timely communications, it can lead to confusion and mistakes.

Benefits and Drawbacks of 401(k) Recordkeeper

How to Choose the Right 401(k) Recordkeeper

Evaluate Expertise and Experience

Not all recordkeepers are created equal. When choosing a provider, employers should consider their expertise and experience in 401(k) recordkeeping. They should ask for references and talk to other clients to assess their satisfaction.

Assess Technological Capabilities

Employers should evaluate the recordkeeper's technology. They should look for a user-friendly platform that makes it easy for participants to manage their accounts. They should also consider the recordkeeper's ability to integrate with the company's payroll system and other software.

Cost Considerations

While cost shouldn't be the only factor, it's an important consideration. Employers should understand all fees associated with the recordkeeping service and how they are paid. They should also ensure that fees are reasonable in relation to the services provided.

Employee Support and Education

Employers should look for a recordkeeper that provides robust support and education for participants. This can help employees make the most of their 401(k) and achieve their retirement goals.

How to Choose the Right 401(k) Recordkeeper

Conclusion

In the dynamic landscape of 401(k) plan management, the role of 401(k) recordkeepers is pivotal. Their key responsibilities around accurate record-keeping, regulatory compliance, and participant communication are crucial to the smooth functioning of a 401(k) plan.

While there are challenges, such as cost implications and technological dependence, the advantages they bring in terms of streamlined processes, reduced administrative burden, and offering employee education are immense.

The future of 401(k) recordkeeping is promising, with technological advancements leading the way, evolving regulatory landscapes offering new opportunities, and increasing importance placed on cybersecurity.

Employers must carefully evaluate and choose their 401(k) recordkeepers, bearing in mind their expertise, technological capabilities, cost, and participant support systems.

401(k) recordkeepers will continue to play an indispensable role in shaping an efficient, compliant, and participant-friendly retirement planning ecosystem.

401(k) Recordkeepers FAQs

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About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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