Why You Should Avoid Using Your Payroll Provider as Your 401(k) Provider

by Ary Rosenbaum
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In the business world, it is often common that corporations add different product lines or a brand extension as a natural outgrowth of their business. Pepsico added Frito-Lay, Tropicana, Quaker Oats, and YUM Brands (since sold off) to their business lineup since they saw it as a fit with the soda business. Amazon.com, the Internet superstore started out selling books, then added music and video, and then added everything under the sun because they thought that they could handle the fulfillment of all these product lines at a better selection and price than a brick and mortar store. However, there are times when adding different product lines or industries or brand extensions to an existing business isn’t a good idea because it either offers no synergy or because the business making the addition is ill equipped to handle it. Ben-Gay Aspirin, Smith and Wesson mountain bikes, and Lifesavers Soda are some business and brand extensions that might have looked good on paper, but fizzled out. Another idea that looks good on paper to retirement plan sponsors (but not to retirement plan experts) is third party administration of retirement plans being handled by payroll providers.

Many third party administration (TPA) firms add different lines of business that are connected with retirement plan administration such as offering investment advisory services, insurance, and legal document services. While we can debate whether what is known as producing TPAs are a good idea, there is a natural nexus between these services and the administration of retirement plans. Like Smith and Wesson bikes and guns, there is no connection between payroll services and retirement plan administration. While the two top payroll providers in the country advertise their TPA services as being seamless because it is integrated with their payroll services, the only thing that payroll has to do with 401(k) administration is the fact that the salary deferral contributions are deducted from employees’ paychecks. There is more to 401(k) plan administration than payroll deductions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ary Rosenbaum, The Rosenbaum Law Firm P.C. | Attorney Advertising

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