Ceridian’s New “2.0” Integrated Payroll and 401k Option
August 18, 2011 1 Comment
Employers: Save 100 + hours of administrative work each year with an integrated Ceridian and Invest n Retire solution
Invest n Retire® (INR) has partnered with Ceridian®, a leading national provider of human resource, payroll and benefits administration solutions, to offer a new, fully integrated payroll and 401(k) solution. This integrated solution relieves HR of most of the manual labor required each time a change is made to the record keeping system, and is also fully compliant with the Department of Labor’s April 2012 regulatory changes on fee disclosure.
The enhanced compliance aspect is a substantial competitive advantage compared to other integrated platforms available today. According to Darwin Abrahamson, CEO and Founder of Invest n Retire, “While other providers struggle to determine how they will comply with the new fee disclosure regulations coming from the Department of Labor, these monumental changes are also creating headaches for HR, not to mention the added costs: upwards of $35,000 in consulting fees. The good news is INR is already fully compliant.”
As a result, a number of plans are converting to our integrated solution for this very reason, citing a substantial time, cost and resource savings in doing so. However, this is merely one facet to a suite of new benefits. At the core of this approach is a fundamental shift in what defines retirement success, taking the focus away from education and placing it on technology.
According to Lou Harvey, CEO of Dalbar, Inc., “Continued efforts since 1996 to help participants make informed decisions through educational sessions have been futile.” In large part, this futility results from the purpose of such education, which has been directed at training participants to perform largely manual processes.
However, these processes have now become fully automated, so participant education can begin to focus on the bigger picture of achieving retirement peace of mind. Plus, we are now able to offer a “second level” of integration — a development available on Ceridian and INR’s fully integrated platform.
Two Levels of Integration
Level 1.0 Integration: Administrative
The first level of integration revolves around administration, with the goal being increased efficiency through automation of manual processes. This is best understood through a brief, somewhat comical story that came about after watching a demonstration by a large multinational conglomerate showcasing their technology.
The technology was offered by a major insurance company and payroll was delivered by an equally large, but separate company. The first stop on this guided tour was a demonstration of the accessibility to a few crucial pieces of information, starting with contribution rate. Unfortunately, after nearly 10 minutes of searching, the effort was abandoned as no such data could be found. The only promising development was the discovery of a brightly colored button that read, “Change contribution rate.” Upon clicking, a pop-up screen appeared with a low quality, scanned PDF file, laden with boxes and instructions — the sheer presence of which was almost certainly met by a spike in blood pressure for the HR director delivering the presentation.
On this platform, in order for a participant to change their contribution rate, he or she needed to print out this form, fill out their personal information, specify their current contribution rate, indicate the new rate they wanted, and (after a lengthy disclaimer which took them to a second page filled with even more disclaimers) “simply” sign the document and send it to their HR manager — in another state. Needless to say after talking with several participants, changing contribution rates was not exactly a favorite topic. (Figure 1)
Initial Problem (Poor)
Figure 1: The manual participant / manual HR model
An obvious step in the right direction would be to eliminate that form, not simply for the benefit of the HR director’s health, but also for the benefit of the participant. Automating the process online would mean that a simple click would deliver the information previously included in the form. But where did this information go? To the same place as the form went before, HR. (Figure 2)
Improved Solution (Better)
Figure 2: The automated participant / manual HR model
Therefore, eliminating the form, by offering a higher level of ease to the participant, would be a first step; after all, this would eliminate the manual work for the participant, but the manual work for HR still exists. In order to deliver the goal of increased efficiency through automation of manual processes for everyone; full integration is the superior solution. (Figure 3)
Full Integration (Best)
Figure 3: The automated participant / automated HR model
This level of integration automatically updates data in the payroll system when a change is made on the record keeping system — most manual HR duties are removed from the equation. According to a recent survey of small and medium-sized business, this could save around four hours per payroll period, or over 100 hours of work per year — numbers that would likely be much higher for larger companies.
Integration of payroll and 401(k) substantially reduces repetitive administrative functions and results in numerous additional efficiencies, including easily managing changes in deferral amounts, calculating loan repayments, gathering census data and more:
1) Employees make contribution change requests online through the INR Participant website. Contribution requests are automatically sent to Ceridian through a secure FTP upload. Employee contribution changes are automatically updated within the Ceridian system and are processed the next pay period. (Contribution change requests include pre-tax, Roth, catch-up pre-tax and catch-up Roth).
2) Each pay period, the INR system computes each employee’s contribution rate, for each elective source, based on the employee’s annual salary and the contribution information included in the payroll file. In this way, the employee can confirm the contribution rate for each employee elective source that is being deducted from his or her pay each pay period.
3) INR collects census information from Ceridian through payroll files, which allow the third party administrator (TPA) to access the information through the INR Sponsor Portal. The census information can be electronically downloaded by the TPA for use in ACP, ADP, and/or Top-Heavy testing, if required by the plan.
Level 2.0 Integration- Participant
The second level of integration revolves around participants’ needs, with the goal being to deliver the best opportunity for participants to develop an adequate retirement fund. To accomplish this, every aspect of a plan needs to be “firing on all cylinders.” So, much like an engine, the plan not only needs to be built from superior parts, but in order to run correctly, all of those parts need to be working together.
The need for evolution in retirement plans is essential, as major sources like Businessweek, The Wall Street Journal, Reuters, Bloomberg, Forbes, CNBC, 60 Minutes and many others continue to report on retirement savings problems ahead for most Americans. The numbers are unavoidable, the problems are there — it is time for change.
There are three fundamental aspects that contribute to the long-term success of a retirement plan for participants: cost, compounding and contribution (The 3 C’s™). A brief example will demonstrate the power of this.
According to the U.S. Census, the average American worker makes $32,140 and, according to Dimensional Fund Advisors, the average retirement plan participant contributes 6.8% of their salary to the plan. This means that, by rough numbers, the average person has around $2185.00 going into their retirement plan every year.
Average American Income
Figure 4: Average individual salaries for Americans. Source: US Census Bureau
Without considering inflation or a host of other factors, consider an individual who just turned 30, has saved $10,000 already and is headed for retirement at 65. Say this person makes the average amount of $32,140, contributes the average amount of $2185, their money grows over that period at 5% and the plan costs near the average of 1.50%. Let’s call this starting point Option A.
If this cost were decreased by 1.00% of assets to a new cost total of 0.50% of assets, the balance over 35 years could increase by roughly 26%.
Impact of Cost
Figure 5: The impact of a 1.00% cost reduction over 35 years. Other than cost, values are the same, starting balance of $10,000, earning 5% and contributing 6.8% of a $32,140 salary. View Math.
Now say, rather than earning an average of 5% over that period, returns could be 1% higher, averaging a 6% return over the period. For a plan costing 1.50%, the projected balance could catch up to the asset level achieved by the cost decrease alone, $237,128 (therefore the plan would have 1 of The 3 C’s™).
However, under these new circumstances, starting with a cost decrease and then adding a compounding return increase (thus the plan has 2 of The 3 C’s™), the returns would be 27% higher than the $237,128; achieving a new projected balance of $302,109.
Impact of Compounding
Figure 6: The impact of a 1.00% compounding return increase (now 6%) over 35 years. Option A reflects the impact of this change without cost reduction (1 C) while Option B reflects the impact of this change with 1.00% cost reduction (2 C’s). View Math.
For the final element, contribution, consider again the starting option. With an increase in performance, this option was able to reach the projected asset outcome achieved by the cost reduction alone (the plan has 1 C). Yet, allowing the cost reduction option to also receive a 1% performance increase (the plan has 2 C’s) now improves the projected balance by 27% more. Finally, consider a 1% increase in contribution rate, from 6.8% of compensation to 7.8% of compensation.
Impact of Contribution
Figure 7: The impact of a 1.00% contribution rate return increase (now 7.8%) over 35 years. Option A reflects the impact of this change with 1.00% increased performance but without 1.00% cost reduction (2 C’s) while Option B reflects the impact of this change with 1.00% increased performance and 1.00% cost reduction (The 3 C’s™). View Math.
Now, with the plan possessing all of The 3 C’s™, the balance is again higher than if the plan only had lower cost and increased compounding performance (2 C’s); but more importantly, the increase in projected balance by adding the third C, contribution to the plan, was 33%.
What this implies, through basic mathematics, is that regardless of how your plan is designed, if you only have 2 out of The 3 C’s™; your plan is not delivering the fullest benefit to its participants. Only by offering all 3 can a plan deliver the most from its design.
The final point to examine in this example is the difference between the projected balance from the initial starting Option A, a plan with none of the C’s that projected a balance over 35 years of $187,539. Comparing this to plan Option B, containing all of The 3 C’s™, with a projected balance of $364,331; the difference is a 94% increase in projected balance.
Figure 8: The compounding effects of The 3 C’s™ on projected retirement asset levels over the starting average.
The power in these examples will come as no surprise to most; because the problems created for participants by lacking any of The 3 C’s™ in a plan have been well publicized, while the solutions for such problems have also been presented.
Costs should be lower:
Problem: “over a 35 year period…the 1.00% difference in fees… would reduce your account balance at retirement by 28 percent. – U.S. Department of Labor
Solution: Using Exchange Traded Funds (ETFs) which track indexes instead of actively managed mutual funds “could reduce …fees and costs by 0.70% of assets or more.” – Center for Retirement Research at Boston College
For this reason, Forbes Magazine says that “ETFs are 401(k) Plans’ Next Big Thing” – Forbes Magazine
Compounding returns should increase:
Problem: With regard to investment options “90% of…401(k) and other defined contribution assets in mutual funds are actively managed” – The Wall Street Journal
Solution: By comparison, the benchmark indexes (which ETFs track) “outperformed 71.9% of actively managed…mutual funds.” – The New York Times
Further, when selecting the mix of these investments within a participant’s account as a whole, “84.2% of participants would fair better” with professional management than by selecting their own investment mix. – John Hancock® Study
Contribution levels should improve:
Problem: “Unless people begin… contributing more to their 401(k) plans, advisers say, they are destined to hit retirement with too little money. – The Wall Street Journal
Solution: ” INR’s integrated retirement calculator has led to increased deferral rates of “60% from 7.39% to 11.76% and plan participation has risen from 64% to 85%.” – InR’s Profit Sharing Council of America Award
Therefore, cost should be low, compounding returns should increase and contribution rates should improve and be correct to achieve a specific goal.
With a non-integrated plan, the dependency has been on education, largely ignoring these factors and instead attempting to turn participants into investment experts — an impossible task. But even if a non-integrated plan possessed these traits (cost, compounding and contribution), it would not be enough to simply offer them. Participants would then have to be taught how to manage each, both independently and simultaneously, in an effort to make them work together so the maximum benefit can be achieved. For participants, that experience feels much like sorting through this:
Figure 9: Heisenberg’s Uncertainty Principal in Quantum Physics which accounts for the effect that by observing one factor, all other factors are changed as a result- a slightly comedic parallel to the task asked of participants
in non-integrated plans.
Without integration there is very little automation for participants, requiring most tasks to be performed manually. The instructions in “how” to perform these tasks are delivered through participant education, which serves as the primary factor in defining how to achieve retirement success. An example of this can be seen very easily with retirement calculators; non-integrated plans require participants to enter information manually.
Non-Integrated Data Flow (input model)
Figure 10: Non-integrated platforms depend mainly on the participant to input data. The quality of the output from technology like retirement calculators depends on the quality of the input from the participant, which is dependent on the participant becoming educated to use the technology effectively.
The problem with this model is the burden it places on the participant; it is based on their input and therefore the quality of their education to provide such input. When thinking about a retirement calculator, for example, some pieces of data are obvious and easy for participants to enter, such as age and salary — data that payroll already has, but has not been factored because there is no integration.
However, when you get to something like target rate of return, which nearly all major retirement calculators require, now what? Does the number enter your mind as easily as age and salary? Does it even enter your mind at all? This information — return history, investment options, costs — this is data the record keeper already has, but again, has not been factored because there is no integration.
So without integration, the participant is required to understand and be responsible for interpreting and entering everything correctly, doing all the manual investment calculations (cost), portfolio adjustments (compounding) and attempted contribution rate changes (contribution).
Integration shifts these tedious duties to technology, allowing what defines achieving retirement success to move away from participant education and towards technology. The output-based model makes things far easier for a participant through a reduction in tedious, monotonous manual data input (age, salary) and rigorously difficult calculations.
Integrated Data Flow (output model)
Figure 11: Integrated platforms depend on technology to work by using data integrated between payroll and recordkeeping so the quality of output is no longer dependent on educating the participant.
This model demonstrates how integration allows data which had once been unavailable, to now become usable. Participants no longer have to become professional portfolio managers or retirement planners to reach their retirement goals; technology performs nearly all of the work for them.
However, as most plans know, not everyone uses the technology made available to them. Some participants are more un-engaged, using the technology rarely or not at all; while others are very engaged, using the technology frequently. The integrated model allows for the most benefit to be delivered to each type of participant.
Participants who choose to be un-engaged receive the best default solution (the example in Figures 5, 6, 7 and 8 above): Low-cost investments in a portfolio managed by professionals (cost, compounding and default contribution rate). The majority of participants fall into this category, according to retirement expert and distinguished MIT professor, Robert C. Merton.
Participants who then choose to become engaged have a meaningful experience that results in a benefit exceeding the option to be un-engaged — they receive clarity of retirement goals and the contribution rate required to reach them (cost, compounding and needed contribution rate)
Participants who engage the technology receive the greatest benefit, not simply cost and compounding, but contribution as well, because it can only be set to the needed level (above default) by participant-directed action (use of the technology).
In the previous examples of Figures 5, 6, 7 and 8, basic math illustrates the impact of slight 1% changes. But consider what would happen if a participant increased their contribution rate by several percent using this approach, to the needed amount determined by the calculator. The effect would be substantial. By allowing participants to harness the synergy offered by The 3 C’s™ easily and effectively with new technology, plans will not just see greater successes for those who are engaged, but also develop greater potential for influencing participants who had traditionally been un-engaged to use the technology and in turn, raise the benefits for everyone.
For the first time, all of the above benefits are available with Ceridian and INR’s 2.0 Fully Integrated Payroll and 401(k) option. A demonstration of this experience can be observed in this short video.
Joint efforts make a new experience possible
Joint efforts offer administrators and participants an entirely new experience. For example, participants log in to the INR Participant website and use INR’s proprietary retirement calculator, where they are presented with a pre-populated calculator containing all of their personal and investment return information. Simply clicking “submit” takes them to a screen that illustrates what they are projected to have saved at retirement based on the current information, followed by the amount they need to save for retirement, and if there is a shortfall, by exactly how much they need to increase their contribution rate to get on track.
If they see that they need to increase their contribution rate, all they need to do is make one click, confirm the change, and log out. Meanwhile, the contribution rate change is automatically updated with Ceridian and reflected in the next pay period.
As you can see, this is the essence of simplicity with a fully integrated, outcome-based approach. Rather than requiring participants to focus on input (picking investments, reading manuals, referencing statements), they simply have to manage a few key output factors (changing contribution rate, moving to a model with a higher historic rate of return, decreasing the percentage of income they estimate they will need at retirement, or delaying their retirement by working a few more years) and that’s it.
By focusing on four simple factors, with all aspects of their specific information integrated and working together, participants only need to make slight adjustments to stay on track and achieve retirement peace of mind quickly and effectively.
As a result, plan sponsors have been eager to share their successes using this approach:
Before, “It seemed like the participants, myself included, were putting money into the old plan and it just never seemed to be growing.” But now with the new INR platform, “Participants really appreciate what we’ve done…we can actually see our money growing…and the statistics on our plan will show that participation has increased…and contribution rates have increased… it’s just much easier.” Chris R., Plan Sponsor (Video Interview).
“This has been a huge success; the feedback we get is all positive.” Mike K., Plan Sponsor (Video Interview)
Benefits of INR’s integrated 401k platform
It starts with low-cost investments: INR offers Exchange Traded Funds (ETFs) as investment options allowing participants to own whole and fractional shares of low-cost ETFs in their retirement account. Adding low-cost investments increases participants’ returns by the cost savings without increasing investment risk. New to ETFs? See the Wall Street Journal’s recent article: ETFs Roar Ahead, Shrug Off Criticism.
ERISA §3(38) Investment Manager: Through INR’s platform, a plan sponsor may hire an ERISA qualified §3(38) investment manager. This allows the plan sponsor to transfer his or her fiduciary responsibility, in writing, to the §3(38) manager for selecting, monitoring and managing the investment options offered to plan participants.
Model Portfolios: The §3(38) investment manager designs age-based model portfolios as qualified default investment alternatives (QDIA). Participants who still wish to choose their own investments may continue to do so, although studies demonstrate that only five percent (5%) of employees choose to pick their investments. This attests to the strong demand for professional portfolio management.
Retirement Calculator: Participants ask, “How much do I need to save for retirement?” To help answer this perplexing question, INR provides participants with a retirement calculator that is integrated with payroll information.
Record keeping and payroll integration: Full integration with payroll facilitates INR’s ability to pre-populate personal information into the calculator; such as age, salary, and contribution rate. The calculator also pre-populates the historical rate of return for the participant’s investment model so that the participant is not required to figure out target rate of return through an arduous task. With all this information automatically accounted for, a participant needs only to press a single button to clearly see what they need to save, whether or not they’re on-track to reach that goal, and if not, what can be done to get on track (such as increasing contribution rate; with the exact increase amount already calculated and clearly shown to the participant).
Mandatory Fee Disclosure: INR discloses fees for plan services, which are paid by participants by deducting fees from their retirement account, in dollars and cents on their quarterly statement. Since ETFs do not charge revenue-sharing fees, which are paid to third parties for plan services, INR eliminated the “revenue sharing fee payment arrangement” hurdle. This ensures that INR is in full compliance with the Department of Labor fee disclosure regulations under ERISA §404(a)(5).
Virtual Audit: INR provides auditors with a Statement on Demand which contains all of the information an auditor will need in order to perform the annual plan audit. The auditor can now work from the comfort of his or her office in performing this sometimes arduous task. This process not only reduces the cost for an audit by 25% on average, a virtual audit relieves HR from being saddled with the task of digging through records and providing the information to the auditor in order for the auditor to complete his job.
Simplifying the conversion process: INR works directly with prior service providers in determining timelines for the black-out period, receipt of employee records and transfer of plan assets so that HR is relieved of these burdensome duties.
Ceridian and INR’s fully integrated payroll and 401(k) solution drastically reduces administrative work and offers a powerful new retirement solution to participants.
Administration is eased in the short term by removing the burden of repetitious, mundane and time-consuming tasks. While over the long term, having a plan that is fully compliant with the April 2012 Department of Labor fee disclosure regulatory changes can save an untold amount in cost, time and resources.
The benefits of a two-layer, integrated approach are not just administrative. The average 401(k) balance in the United States for a person approaching retirement is only $60,000. A contemporary approach that magnifies each element of a 401(k) plan to deliver powerful benefits offers a new way forward to ease the stress and confusion of manual, non-integrated plans.
The technology behind this platform delivers a final benefit to the company. By streamlining payroll and 401(k) processes, avoiding costly fee disclosure compliance and reducing the cost of investments and lowering audit expenses, the potential impact is immeasurable and presents a compelling case for change — a process which has also been made easier through integration.
RIA’s looking to offer this solution to their current clients by serving as an ERISA qualified §3(38) investment manager are invited to contact the author for more information: Neil@investnretire.com