Traditionally, 401(k) recordkeeping involved manual processes that were time-consuming and error-prone. From tracking employee contributions to managing distributions, everything involved paper records and spreadsheets. It restricted participant’s control over their retirement accounts.
The digital transformation of recordkeeping systems has made the process more efficient and accurate. Recordkeeping service providers automated processes like calculating employee contributions and managing distributions to speed up processing time. They also offer digital tools such as online dashboards and mobile apps to offer easy and secure access to their contributions, investment options, and account balances in real time.
Application Programming Interfaces (APIs) are helping 401(k) recordkeepers address the challenges of digital recordkeeping. Simplifying day-to-day administration, APIs are now emerging as the preferred method for accessing and managing payroll data.
This whitepaper delves into why APIs are becoming indispensable for 401(k) recordkeepers. We will also explore the challenges mitigated by APIs, offering a scalable, secure, and efficient recordkeeping solution that significantly enhances the efficiency and compliance of 401 (k) recordkeeping.
Importance of payroll data accuracy in 401(k) recordkeeping
Payroll data includes employee contributions, employer matches, and other payroll-related information that determine the accuracy of retirement plan accounts. Inaccurate or incomplete payroll data can cause errors in recordkeeping activities like calculating contributions, managing distributions, and reporting on account balances. It affects participants’ retirement savings and leads to compliance issues for recordkeepers.
Recordkeepers require robust data validation and verification processes to maintain high payroll data quality. Traditional methods include Secure File Transfer Protocol (SFTP), which involves time-consuming and error-prone manual data entry. Application Programming Interfaces (APIs) streamline recordkeeping by directly connecting payroll systems to recordkeeping databases. It does not require manual data entry and increases accuracy by offering real-time data exchange between payroll systems and recordkeeping solutions to ensure accurate and up-to-date payroll data.
The limitations of traditional SFTP methods
According to the IRS’s 401(k) Plan Fix-It Guide, inaccurate or incomplete payroll data results in retirement plan errors, which may lead to significant penalties, additional costs, and resource-intensive corrections for sponsors.
The increased adoption of payroll technology by plan sponsors has made accessing accurate and standardized payroll data more complex. Participant data now comes from various payroll solutions and may have different formats, making it challenging to integrate into recordkeeping systems. SFTP methods require manual data entry into recordkeeping solutions, which lengthens the process.
Additionally, traditional recordkeeping solutions cannot efficiently handle the increasing volume of payroll data as they are designed for batch processing. It hampers real-time access to accurate data for providing participants with up-to-date account information.
The challenges 401(k) recordkeepers face
1. Supporting a growing number of SMB sponsors: SECURE 2.0 and state mandates are driving small and mid-sized businesses (SMBs) into the retirement market. Compared to larger enterprises, these SMBs lack strong HR departments and seek recordkeepers to help reduce administrative tasks. However, using SFTP for data transfers requires sponsors to create and update payroll data files each pay cycle, which is time-consuming and prone to errors. It makes efficient data management complicated.
2. Streamlining access to payroll data: The SMB payroll market is highly fragmented, with nearly 6,000 providers in the U.S. alone. Each provider stores payroll data in different formats, complicating data management for recordkeepers. SFTP needs ongoing updates and manual payroll data uploads. The lack of standardization forces recordkeepers to spend extra time and resources standardizing the data, which can lead to compliance issues due to errors and delays.
3. Maintaining compliance: Compliance with regulatory requirements is crucial for 401(k) recordkeepers. Changes in SECURE 2.0, like automatic enrollment and updated eligibility rules, have made compliance more challenging. Delays or errors in payroll data can lead to missed Service Level Agreements (SLAs) and penalties. The manual use of SFTP increases the risk of Not in Good Order (NIGO) errors, like improper data formatting or incorrect entries, leading to compliance issues.
4. Improving operational efficiency: Supporting large volumes of participant data significantly strains recordkeepers. Scaling their teams to keep up with the manual work involved in SFTP processes is neither cost-effective nor sustainable. Recordkeepers are under increasing pressure to improve operational efficiency by automating routine tasks such as eligibility checks and deduction updates.
How do APIs solve these challenges?
APIs provide a secure, scalable, and efficient way to connect payroll systems with recordkeeping solutions. They enable direct communication between the two systems. This means that data can be transferred seamlessly and in real time. APIs also ensure data accuracy and integrity by directly validating information from the payroll system against recordkeeping regulations to strengthen compliance.
Benefits of APIs in 401(k) recordkeeping
The key benefits of using APIs for 401(k) recordkeeping are:
- Real-time data integration: APIs facilitate real-time data integration between payroll systems and recordkeeping databases. It enables immediate updates of employee contributions, distributions, and account balances.
- Automated processes: APIs automate data validation, contributions calculations, distribution management, and account balance reporting. It reduces errors and time spent on manual tasks.
- Greater accuracy: With direct connectivity through APIs, there is no room for human error or delays caused by manual data entry. It ensures accurate and up-to-date information for participants’ retirement accounts.
- Enhanced security: APIs offer secure data transmission between payroll systems and recordkeeping databases, reducing the risk of data breaches.
- Scalability: APIs provide a scalable solution to handle growing volumes of data without compromising accuracy or speed.
- Better user experience: With real-time access to their retirement accounts through digital tools like online dashboards and mobile apps, participants have better control over their savings. It also lessens employers’ administrative burden and allows participants to manage their accounts independently.
- Improved compliance: APIs automate compliance-related tasks like eligibility checks and contribution updates. They enable accurate and timely data exchanges, reducing the risk of compliance issues caused by manual errors or delays.
How can Congruent Solutions’ APIs help recordkeepers?
Congruent Solutions understands the challenges faced by 401(k) recordkeepers and has developed a suite of APIs designed to address these challenges. Our APIs offer a secure, scalable, and efficient solution for integrating payroll and HRIS systems, enabling recordkeepers to streamline operations and improve service delivery.
1. Seamless integration with payroll systems: Our APIs give recordkeepers real-time access to payroll data, removing the need for manual file transfers and cutting error risk. They can connect to multiple payroll systems, ensuring access to accurate and up-to-date data.
2. Automation of routine tasks: Congruent Solutions’ APIs automate many routine tasks of plan management, such as eligibility checks and contribution updates. It reduces the administrative burden on recordkeepers and sponsors, allowing them to focus on more strategic activities.
3. Enhanced compliance: Our APIs help recordkeepers comply with regulations by automating processes and ensuring timely, accurate data transmission. It reduces penalties due to errors and delays, providing recordkeepers peace of mind.
4. Improved sponsor experience: Our APIs provide recordkeepers with a more integrated and seamless experience to plan sponsors. Our APIs simplify retirement plan management and enhance sponsor satisfaction.
Congruent Solutions offers a comprehensive solution to 401(k) recordkeepers’ challenges. We enable secure data transmission, automate processes, enhance compliance, improve user experience, and provide a cost-effective solution for recordkeeping operations. Connect with Congruent Solutions today to learn how APIs can help you deliver exceptional recordkeeping service.
