401(k) Recordkeeping Overview

401(k) recordkeeping services should be performed scrupulously to ensure a viable program. All transactions must be properly reflected in participants accounts; failure to do so can distort participant balances and endanger the favorable tax status of the plan.

Meticulous recordkeeping must track the various contributions that come into the 401(k), the crediting of investment earnings and amounts distributed from it. Unless the company is very small, it is important that recordkeeping be coordinated, electronically, with the payroll system. Regarding contributions, it must track, separately, employee deferrals and aftertax voluntary contributions as well as employer matching, qualified non-elective and profit sharing contributions. Recordkeeping requires a more sophisticated approach when participant-directed investments are available than when investments are pooled. Recordkeeping must track all investment transactions for participant-directed accounts; for pooled accounts, earnings must be allocated to individual participants based upon their share in the pooled fund. Distributions may occur on separation from service, as loans or hardship withdrawals; since each of these involve different types of transactions, they must be tracked separately.

Recordkeeping services can be performed by various types of service providers. They can be performed in-house, by a third-party administrator, a separate recordkeeping firm or a bundled service provider. Basically, in-house recordkeeping will be feasible only for larger employers. A third-party administrator will frequently perform both recordkeeping and administration; however, since many firms concentrate on administration rather than recordkeeping, the use of an organization specializing in recordkeeping services may be required. If a bundled service provider such as a mutual fund is used, a good recordkeeping system is frequently available; however, not all such funds are able to track participant-directed investments on a participant level. If a bundled provider uses the services of another organization for recordkeeping, checks should be made that it is performed properly. When selecting recordkeepers it is important to examine the services they provide and the quality of their work. This can be accomplished, to some extent, by requesting proposals and sample reports from them.

Where possible, it is important to negotiate recordkeeping fees when the 401(k) is established. Once the 401(k) has been in existence, employers can frequently reduce recordkeeping fees by negotiating (since per unit costs should decrease with an increase in the number of participants), switching the recordkeeping function to another service provider (caution should be exercised since this may necessitate switching all 401(k) functions to the new provider) or shifting recordkeeping costs to employees by having them deducted directly from their accounts (this is obviously easier to accomplish when the plan is established).

401(k) Further Assistance

Please complete our short form listing your 401(k) questions or problems. We will reply to 401(k) concerns of employers and their representatives promptly. Or call us at 718-793-9885. Our web site home page contains additional useful information about 401(k) plans


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