Everything You Need to Know About 401(k) Payroll Integrations in 2024

If you’ve ever worked in the retirement benefits space, you know that keeping track of information between systems is one of the most challenging aspects of managing 401(k) plans. Using manual methods makes it even more difficult. For this reason, the popularity of automated 401(k) payroll integrations is on the rise. 

In this article, we'll cover how 401(k) payroll integrations work, the differences between 180 and 360-degree payroll integrations, the cost and risks of sharing data manually, and some frequently asked questions. 

We will also discuss how Finch is powering payroll integrations for top players in the retirement benefits industry such as Human Interest, Betterment, Ubiquity, and more—helping them offer best-in-class 401(k) experiences for employers and individuals.

How payroll integrations work in 401(k)

A 401(k) plan is a defined contribution plan. Employees receive a certain amount at retirement based on their contributions over the years. They defer a part of their wages into a 401(k) account which is processed and managed by plan administrators and recordkeepers. 

Employers, or plan sponsors, are in charge of running and overseeing the retirement plan. They:

• Enroll employees into 401(k) plans based on their eligibility
• Calculate contribution details 
• Record deduction details for each pay cycle

While employers can offload some of the responsibilities to a recordkeeper, there is often still a surprising amount of manual work involved. Typically, employers manually enter the data and make necessary adjustments in their payroll system or to their recordkeeper’s system.

Some plans allow employees (or participants) to submit modification requests for their deferral options too. This leads to more administrative burden and complexity for employers and recordkeepers. 

In the absence of 401(k) payroll integrations, plan sponsors are responsible for ensuring employee deductions and employer contributions are always up-to-date between systems. 

But when the employer’s payroll is fully integrated with the plan administrator's system, any changes made to employment status or contribution rates are automatically adjusted.

Who benefits from 401(k) payroll integrations?

401(k) payroll integrations are critical to all stakeholders involved in enabling retirement benefits to employees. This includes plan sponsors, payroll providers, 401(k)/retirement plan administrators, and recordkeepers. 

Plan Sponsors

401(k) plan sponsors benefit greatly from payroll integrations. They automate employee enrollment as well as contribution and match updates. This boosts operational efficiency, reduces data entry errors, and eliminates the need for manual data reconciliation by sponsors.

Payroll Providers

According to our recent survey, today’s employers on average use 6-7 employment systems. As a result, they are always on the lookout for integrated experiences. As retirement benefits gain popularity among employers, especially small and medium businesses (SMB), the demand for payroll providers that easily integrate with chosen 401(k) plan administrators will also rise. This makes integrations essential in the payroll tool decision-making process.

401(k)/Retirement Benefits Plan Administrator

Retirement plan administrators can improve data accuracy and process efficiency with payroll integrations. They can also use it to offer customizable and tailored 401(k) solutions. This helps them build trust and loyalty with employers in the competitive retirement benefits market.

Recordkeepers and Third Party Administrators (TPA)

Recordkeepers and TPAs can harness bi-directional data synchronization—that is, the ability to pull employment information from payroll systems and push contribution data back —enabled by payroll integrations, to reduce data reconciliation efforts and demonstrate higher responsiveness throughout the retirement plan cycle. 

180° vs 360° payroll integrations in 401(k)

Payroll integrations are automated connections between employers’ payroll systems and 401(k) plan administrators. There are two types of connections available based on the scope of data flow: 180 payroll integrations and 360 payroll integrations. 

180 degree payroll integration

In a 180 degree payroll integration, data flow is unidirectional—from payroll providers to the 401(k) systems. This means whenever employment data (such as termination, address, promotion, etc.) is changed in payroll systems,  a 180 degree integration will automatically update the information in the 401(k) software or the recordkeeper’s system. 

However, if an employee modifies their contribution details in the 401(k) tool, it will not be reflected in the payroll system. The employer will have to update the changes on the payroll platform manually. This leaves room for data entry errors.

While it is more advanced than manual data entry, bulk uploads, or SFTP, 180 degree integrations are still limiting in scope. 

360 degree payroll integration

With 360 degree payroll integrations 401(k) plan providers can bi-directionally sync data with the employer’s payroll system:

• Any data updated in the payroll system is captured in the 401(k) tool 
• Any contribution changes made in the recordkeeper’s system are automatically adjusted in the payroll tool 

This ensures consistent and up-to-date information exchange between all systems of record. Recordkeepers can automate the entire benefits workflow—from enrollment to deductions changes.

For this reason, 360 degree payroll integration is often a favorite by sponsors. 

Benefits of 180 and 360 degree payroll integrations 

A complete integration between payroll and 401(k) systems is critical. It solves multiple problems for the retirement benefits ecosystem. Payroll integrations can:

Reduce administrative burden and save time for plan sponsors

Extracting and uploading data manually from one system to another every pay period is inefficient and resource-heavy. Employers can save significant time by using advanced integration technology to automatically track and capture retirement data changes.

Improve data accuracy to maintain compliance

401(k) is a heavily regulated industry and the compliance requirements for retirement plan providers are quite strict. 

The manual data entry process is prone to data entry errors causing compliance risks. They can also cause delays in updating deferral details leading to late deposits, wrong investments, penalties, and increased tax liability for employees. 

401(k) payroll integrations, automate and eliminate compliance risks by directly capturing data from the employers’ source of truth. 

Improve 401(k) yearly audit with streamlined employee census

Eligibility to 401(k) plans depends on the employment details captured in the employee census report. Employee census data include:

• Individual employee information (name, address, SSN, date of birth)
• Employment details (date of joining, compensation, eligibility information, employment status)
• 401(k) information (employee deferral and contribution amount)

As employee information changes throughout the year, so does their census data. 

Typically, organizations conduct yearly census updates and send employment data to their recordkeeper. Each time a new employee joins or leaves the organization, plan sponsors must send their eligibility or distribution details to their recordkeepers. It helps to keep the 401(k) plans up-to-date. 

But, doing so involves a lot of back-and-forth data exchange between employers, plan administrators, and recordkeepers. These manual processes can make it more difficult to manage.

180 or 360 degree payroll integrations sync employee census with recordkeepers and ensure that the retirement plan is always compliant and correct. 

Enhance user experience

If you are a 401(k) plan administrator, your ability to attract and retain customers depends on two things: 

• How much administrative burden you can reduce for them 
• How easily they can navigate between different systems they already use

360 payroll integrations enable you to do both. 

FAQs about 401(k) payroll integrations

1. What is the best payroll integration method?

Most 401(k) administrators prefer a 360 payroll integration. It enables them to fetch data from the payroll systems and update contribution changes back into the payroll system without having to lift a finger. Plus, it saves their customers, the employers, the headache of ensuring no data is missed.

But, a 180 payroll integration is better than no integration. Plus, only some payroll systems support 360 integrations. 

Regardless of the use case, manual data entry is the least preferred method for most sponsors and providers due to its inefficient and outdated mechanisms. 

2. How much do payroll integrations cost?

To scale your business as a 401(k) plan administrator or a recordkeeper, you need to provide some level of payroll integration. 

But, building integrations in-house is a costly affair. It requires technical expertise, and hundreds of building, testing, deployment, and maintenance hours. As of 2023, building just one payroll integration can cost SaaS businesses in the retirement industry an average of $187,500. 

Now, multiply that by 5,700+ payroll providers in the U.S. market today, and you’ll see how unrealistic this method is. 

If you have limited engineering bandwidth, look for a unified solution that will make payroll integrations easy and cost effective. 

3. What is the best way to implement a 360 payroll integration strategy? 

If you are an employer, look for a 401(k) plan partner offering bi-directional data sync capabilities (i.e., a 360 degree integration) with your payroll provider.

If you are a retirement solution company i.e. a 401(k) plan provider, recordkeeper, or TPA, create a shortlist of payroll providers that your customers use most. Then explore what a direct integration might look like for each — or contact Finch. 

Finch is a unified employment API that makes payroll integrations quick and easy for retirement benefits solutions. It allows applications to read accurate employment data and write back deduction details back into the payroll system. 

No manual data entry, bulk upload, or SFTP setup is needed. Learn more about Finch’s automated deductions here

How is Finch different from other payroll integration solutions in the market?

• Immediate integration capabilities: Finch is the only payroll integration solution today that offers integrations with 200+ HR and payroll providers in the US. By connecting once with Finch, you can immediately unlock access to hundreds of HR and payroll tools.
• Smooth employer onboarding with Finch Connect: Employers can connect their payroll to your system in two easy steps during onboarding. 1) They select their payroll providers from the options provided, and 2) they sync their account and set up permissions for data transfer using Finch Connect. Thus, completing the onboarding process in 30 seconds. 
• Manage integrations on autopilot: Finch is designed for ‘set up and forget’. It does all the heavy lifting for building and managing integrations. It enables smooth, consistent, and fresh employment data exchange between systems. 

Building a 401(k)/ retirement benefits solution? Let us help you

Finch is powering retirement benefits platforms and 401(k) plan providers like Human Interest, Ubiquity, and Betterment offer employers 360 degree integrations with the payroll provider of their choice. Want to learn more? Set up a call with our sales team here or get started with Finch today for free.