Everything You Need to Know About 401(k) Payroll Integrations in 2024
December 19, 2023
0 min read
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 will 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.
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.
According to a recent survey we ran, 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.
The payroll landscape is constantly evolving, and staying on top of emerging challenges and budding trends is imperative, if not exactly easy.
Recently, we sat down with Keely Aguayo, a nine-year payroll veteran and Finch’s own payroll and benefits advisor, to talk about what’s new and next in the space. Having worked in payroll leadership positions at some of the most exciting and fast-growing companies, she offered tremendous insights on post-pandemic complexities, reporting shortcomings, and more that we didn’t want to keep to ourselves.
Diana: Great to chat with you today. As a quick intro to the audience, my name is Diana Liu. I’m the first business hire at Finch and currently work on product and channel partnerships. I am incredibly excited to interview our resident payroll expert, Keely, about all things payroll today. Keely, would you mind giving a quick intro about yourself and your background, as well as what you're doing at Finch?
Keely: Sure. Hi, everyone. My name is Keely. I've been working with venture-backed startups to manage payroll, benefits, and compliance for about nine years now, and I am currently advising Finch on all payroll and benefits needs in relation to their product.
Diana: Awesome, thank you so much for that intro. So, you've had a chance to do payroll for some of the most tech-forward companies in HR tech. I'm really curious to know – what are some interesting trends that you're seeing? What are some of the biggest improvements that you've been noticing over time?
Keely: I remember when I first started doing payroll, you had two options. You either went with basic ADP or you went with Paychex or QuickBooks payroll. There weren’t a ton of options out there, and it has been so interesting, almost mind boggling, to see how many new players have come into the market to do payroll and benefits, or one or the other, or HRIS. There are so many names out there that are doing this really well.
I would say the biggest trend that I'm seeing now is rather than just being a payroll provider, providers are now trying to be an all-in-one solution. They want to manage payroll, they want to manage benefits, they want to manage compliance, they want to be able to do all your state filings, help you with registrations, help you really hire these distributed workforces that are becoming so common these days in the tech industry. And it's been really great to see. Obviously, some companies are doing it better than others, but it's so great to know that there are so many options out there now for people to look at when they're looking for a new payroll benefits and compliance provider.
Diana: I'm also really curious, do you see any high-level or major differences between providers that service primarily SMBs versus enterprise employers?
Keely: No, I feel like the provider that works best for a company is very much company-specific. And what that means is, what is their priority? Is their priority a pretty HRIS system that can have all the functionality that they need? Is their priority, "Look, we have a really complex payroll system. We have three different payroll cycles. We have to figure this out. We need a payroll system where the payroll module needs to be super functional." Or maybe it's just, "I don't want to do anything manual, so I want to make sure you are currently integrated with all of my benefits providers, 401(k), health—that it's an all-in-one shop."
And so, it really depends on what the company is looking for, because it's very hard for these payroll providers to do all of it well, right? They're going to concentrate on one section of what they offer. Some of them have an amazing HRIS system, but their payroll's really manual, or it's lacking, or it's not as up to date as some of the other providers on the market. Whereas some others really concentrate on the payroll side of things. Maybe they started out as a payroll provider, and they moved into HRIS, but they weren't able to make their HRIS as functional and as great as their payroll. So, it's really company-specific.
Diana: That makes a lot of sense. And I'm now thinking about my previous company, where, when the pandemic happened, people were allowed to start working remotely and they moved all over the place. I'm really curious to hear, what was your own experience managing payroll throughout the whole pandemic?
Keely: It has definitely been a struggle for a lot of companies. I was remote prior to the pandemic and actually worked with a lot of remote companies, so it was a little bit easier for me to jump in. I knew the nuances. I knew how registrations were going to work, how filings were going to work. I knew that organizations would need to put in some kind of formal process for moves and whatnot. A lot of companies struggled in 2020. I worked with one company—they had 400 people in New York in 2020. At the end of 2020, they had 42 left.
Where did these 350 people go? Yes, some talked to their managers, some put in formal requests with HR, but some didn't say anything until they got their W-2 and were like, "Oh, so sorry, we actually moved across state lines. Can you correct us?" That’s a huge burden on not only the company but the payroll provider, and it's a huge cost, because to redo filings and regenerate forms and that kind of thing is both time consuming and very costly. So, it’s important to put a process around what that looks like but also, from a company standpoint, deciding if you’re going to allow it. Is this just something you are allowing for this year? Is this something you’re going to allow going forward? If you don't allow it, what does that look like?
So, it was a big struggle, and a lot of companies did not do well with it, while others did really well with it. It depended on how you approached it, how much you were on top of it, and what kind of information you provided to the employees. If you didn't tell them that they needed to communicate things, or you didn't give them a way to easily communicate things, it definitely caused a lot of struggles.
I would say the most I've ever seen companies struggle was early 2021, and it was really just fixing filings and W-2s and getting things straight and finding out where their workforce actually was. A big one was obviously if they changed countries, that's huge. “What are we going to do? How are we going to support this?” On the international side, there's a lot of players that have come onto the market since the pandemic started—new payroll providers that work in 120 countries and manage your entire workforce. And that is a byproduct of the pandemic and the issues it caused with US-based companies.
Diana: I'm really curious to get your take on employers of record, or EORs. I feel like a few major players have popped up in the last few years, as you've mentioned.
Keely: EORs are great, obviously, for companies that have a few employees in a particular country but are not at the point where they are able to open up a legal entity there. The EOR stands in as the legal employer in those cases and takes care of all the regulated aspects of employment like payroll, taxes, and benefits.
As with anything, some EORs are great, some are not so great. You can run into issues. EORs are very costly. At what point does it make sense to create your own entity? And I think that's where a lot of companies are struggling now. Maybe the EOR worked when they had less than five people, but now that they have 20 people in the country, does it make sense to open an entity? Does it make sense to offer benefits? What would that look like, and what would be the cost? So, I think EORs are great for what they do, but having 20 or 30 EORs can be a little too much for a company to manage.
Diana: I'm wondering, even with all of these changes, what do you think are some current pain points that still exist today?
Keely: I would say the biggest pain point I see in payroll systems is reporting. I find most payroll systems still lack in their quality of reports, the ability to customize reports, and the ability to have a bank or general report storage that encompasses everything an organization can need.
The way most payroll providers fix this is they do custom reporting, but that can get really confusing and it can be really hard to get the information you need. And then, when auditors come in, insurance providers come in, 401(k) providers come in—maybe you're acquiring a company or you're raising your next round of funding—it can be really difficult to give everyone all the information they ask for.
I would say another thing that comes into play a lot is integrations. My prior company had about a thousand employees. Our payroll system did not integrate with our benefits provider, and that required manual uploads on both ends every month to make changes.
That can be a lot of work for companies but it's one of those things that's like, "Who do we want to partner with? We're not going to integrate with everyone." Maybe you like your benefits and don't want to rock the boat with your employees, but you need a new payroll system and have to decide if you can take on the manual work. And that's where you're seeing a lot of payroll teams within an organization getting very granular—where it's not just enough to have a payroll manager anymore. Now you need the payroll specialist, you need the payroll coordinator, you might even need a director of payroll. And a lot of it has to do with payroll systems not being able to be this true source that they claim to be.
Diana: Sounds like painful manual work to have to update the deductions from payroll to 401(k) every month. Integrations are exactly what Finch provides and this is the exact problem that we're trying to solve. I'm wondering if that's potentially why you decided to start working and advising at Finch.
Keely: I really liked what Finch was doing, and in my first conversation with Ansel I thought, “Why aren't more companies using this backend integration to be able to pull the data that they need?" That's really what attracted me to Finch. I like that it's still like a scrappy startup. They're building something that others are not. They're really trying to build a solution that works with payroll providers and benefits providers. It's not just a one-bucket thing. And honestly, the team's great. I am so happy to be here.
Diana: This might be a bit of a spicy question, but I'm wondering, what are some product improvement opportunities or suggestions that you have for Finch or the Finch product?
Keely: It's very hard to get in the mind of these benefits and payroll providers and be able to support every single deduction and contribution they have. Another byproduct of the pandemic is that you are seeing so many more fringe benefits offered by companies—that is, all of the perks, benefits, and stipends that, in addition to salary, add up to someone’s total compensation package. Things like wellness benefits and employers paying cell phone bills and offering work-from-home internet stipends are all examples of fringe benefits. Those have been gaining traction over the years, but since the pandemic, it has gotten crazy. These things are expected by employees, and every payroll system and HRIS system does it differently. So, some may word it this way, some may word it that way, some may limit how many you can have. So, it's very hard for any one product to be able to pull every subset of data without being the engineer and the product team on the other side of the table.
On that note, I've had some really great client calls since I've been at Finch, and I do see the product going in that way, and I love the idea that we are able to customize it to an extent. I had a recent client call where they had 180 different deduction codes, and I was like, "There's no way we can pull that many data points." And we did an amazing, eye-opening mapping exercise where it was like, "Yes, the Finch product can pull these data points. This is just what it's going to look like. And then these are the ones we can't do, but let's ask questions and see how we can make it work for you." So, I love that the product's still at that phase where we can really customize it and that we're moving that way. But there are also limitations, as in all systems.
Diana: That is great feedback for our product. Thank you for that. I know the product operations team, which you're part of, has been working really hard at researching how to make our product more robust. I would love to know, what are some upcoming projects that you're really excited to work on here at Finch?
Keely: I'm actually going into these payroll and benefit systems, researching the capabilities there, and then going back to the product team and telling them, "Okay, this is what it looks like in this system. This is what we would need to do on the Finch side to be able to pull the data that XYZ company is asking for." So, that's really exciting.
We're also building out playbooks where we are going to have a specific set of instructions and all of these cool videos for each provider that we work with that we will eventually be able to use in our sales pitches. Like, "Hey, we work with another client that uses this system,, and this is what we did for them, and this is the data we can pull.” I'm really excited about that and building out those products that will help Finch grow.
Diana: That sounds like some really impactful and detailed work. That's amazing to hear. It's been really great chatting with and learning from you, and I deeply appreciate the time.