Small business owners are always looking for two things:
- Ways to spend more time running the business.
- Ways to spend less time on the dreaded NGAs – non-revenue generating activities (buying health insurance, learning employment regulations, or filing payroll taxes).
Small business experts figure that owners spend up to 40% of their time on employee paperwork. That might mean handling payroll or administering benefits.
No wonder so many small businesses contract with professional employer organizations (PEOs). This can free up time and people to run the actual business.
What Is a PEO?
A PEO handles administrative and human resources tasks for its many clients.
But a PEO is different from a traditional payroll provider. Rather than simply providing services, a PEO is a co-employer. As legal employer, the PEO can use its size to negotiate cheaper services, like insurance coverages. And the PEO can take on other responsibilities, and even recruit and train employees.
PEOs like to say they bring Fortune 500-style benefits to small businesses. And a PEO may make benefits possible that would otherwise be unaffordable. Examples include HSAs, Flexible Spending Plans, and dental insurance. Many PEOs include 401(k) plans among their menu of services.
How Prevalent Are PEOs?
Since starting in the 1980s, PEOs have become quite popular. They have attracted 100,000 new employees, and 6,000 net new clients, every year over the past 30 years, according to industry sources. There are now between 780 and 980 PEOs doing business in the U.S., serving between 2.7 and 3.4 million employees.
PEOs have grown from a novelty to a sought-after service. And why not? More smaller employers want to outsource paperwork and focus on growing the business. PEOs now serve about 15% of all small business with 10-99 employees
Is a Small Business PEO Right for you?
Whether the PEO route is right for you depends on your business. For example, your number of employees and willingness to outsource administrative decisions.
For example, say you contracted with a payroll provider but obtained health insurance through your own devices. If you switch to a PEO, you give up the ability to select your health insurance provider. In fact, you’ll turn over many services that you outsource to your PEO. And changes can occur at any time.
Your PEO might contract with a health insurance provider that is a great fit for your business. But if the PEO switches carriers, then your employees will experience a change to a key benefit.
PEOs can charge either a flat fee per employee or a percentage of gross payroll. If you plan on growing your business, you should be wary of any fee based on your expanding payroll. A flat fee is far more transparent.
A PEO may be very cost effective for companies with 50 or 100 employees. Larger companies may find it cheaper to hire their own human resources professionals. As your company grows, you may want to rely on in-house employees anyway. Insiders know your company’s business and culture better than a third party provider.
There is another consideration when considering a small business PEO. Is it important to you to establish your own insurance record and worker’s comp experience? If a PEO provides these services your company is not creating its own track record. This may affect future insurance and worker’s comp arrangements down the road.
What About Your 401(k)?
A PEO for small business can also provide access to retirement benefits. It may offer a 401(k) as part of a bundled package complete with recordkeeper and investment line-up.
But here’s you where you should be especially careful. Fees and responsibilities can be difficult to decipher in a bundled package. So accessing a 401(k) through a PEO adds another layer of opacity to the process.
A PEO may work only with its own recordkeeper or with a single entity. That arrangement may work well for the recordkeeper, but it may not be the best fit for you, the plan sponsor.
And make sure to check the PEO’s investment line-up. Compare the fund costs to those of other providers. Bundled services are sold as a money saving alternative. But an independent provider may offer a lower cost fund line-up and it may help you find lower cost recordkeeping option as well.
PEOs may be able to save your small business time and money on admin and HR tasks. But a 401(k) must be run in the best interest of plan participants. That can be tall order if the small business PEO benefits from revenue sharing or other indirect payments.
For an idea of potential conflicts, consider this 2015 lawsuit filed against a large PEO and the investment manager. The PEO hired the manager to select and monitor the investment line-up. The plaintiffs allege that the PEO breached its fiduciary duties by allowing unreasonable recordkeeping and investment fees.
We have no opinion on the merits of the lawsuit. But some arrangements can appear to place the company – not participant – interests first.
For example, the PEO created its own recordkeeping service for its plan and to service other 401(k)s. Instead of seeking bids for recordkeeping, the PEO chose its own recordkeeper. The suit also alleges that the investment manager the PEO hired paid the PEO asset-based revenue sharing fees.
This sort of lawsuit is hardly unique to PEOs. Plaintiffs have filed similar suits against large plan sponsors.
If you are considering a small business PEO to run your 401(k), make sure the fees are transparent, competitive, and all venders are acting in your employees’ best interest.
Speaking of transparency, when checking out any 401(k) provider you should know exactly what duties they will perform. You should also understand what liability they will assume.
You’ll want a 3(16) fiduciary if you want someone to handle day-to-day 401(k) administration. This can include tracking employee eligibility, sending required notices, and filing the Form 5500. A 3(16) fiduciary will also take on the liability that comes with managing your 401(k).
You can learn about ForUsAll’s 3(16) fiduciary services here.
Want More Transparency from Your Current Provider?
At ForUsAll, we believe plan sponsors should not have to devote tremendous company resources to provide a retirement plan.
We offer 3(16) fiduciary services on our plans, no matter the size. We can manage everything from the day-to-day operations of your 401(k) to signing the Form 5500. ForUsAll offers proprietary technology and deep compliance experience. That means we can significantly reduce the work and administrative risk that comes with offering a 401(k).
On the investment side, ForUsAll can act as your independent advisor and 3(38) fiduciary. We believe that efficiency and transparency are the keys to investment success. If there are simpler ways to pay each vendor and disclose those payments, then why use revenue sharing methods that are less transparent?
If you are looking for a direct approach to running your 401(k), talk with us. See if an online 401(k) by ForUsAll makes sense for your business. Click here to schedule a time to talk to us.