How do password managers work? Ultimate IT guide

As a business owner or IT manager, you know how challenging it can be to keep your company's passwords secure. The problems are everywhere: employees struggle to remember dozens of complex logins, sticky notes with sensitive credentials litter desks, and shared accounts get passed around like candy.

This casual approach to password security is a recipe for a data breach disaster, especially considering that 81% of breaches use stolen or weak passwords, with the average cost of a single compromised record reaching $169. For a small business, even one incident can be devastating.

Fortunately, password management software offers a solution by acting as a secure vault to store your passwords and protect your online accounts, requiring employees to remember just one master password while the rest is auto-filled as needed.

So instead of hoping that Peter in accounting hasn't used "password123" for the finance software (spoiler: he probably has), you can ensure best practices are consistently enforced. For businesses without a big IT team, a password manager is a must-have to improve security and simplify credentials chaos. 

But what are password managers, how do they work, and how do you implement them? Let’s walk through it together.

What is a password manager?

A password manager is software that securely stores, organizes, and protects all your login credentials in an encrypted digital vault. Most password managers use advanced AES encryption and "zero-knowledge" architecture—meaning even the provider can't access your actual passwords. Your data is encrypted and decrypted locally using your master password as the key.

Beyond just remembering your passwords, a password manager:

• Generates unique, strong passwords for each account
• Auto-fills logins on websites and apps
• Audits password strength and flags reused or compromised credentials
• Lets you securely share passwords between team members
• Offers a centralized admin dashboard for oversight and policy enforcement

Here's an example scenario: Consider an HR manager at a growing 50-person SaaS startup. Without a password manager, each new hire requires manually creating accounts across multiple systems. Onboarding typically becomes a maze of spreadsheets, passwords scribbled on Post-its, and endless "please reset my login" emails.

Implementing a password manager transforms this process. The IT team can quickly set up secure access for new employees across all necessary systems, while the HR manager can seamlessly manage permissions through a centralized dashboard—no more login runaround.

The benefits extend beyond smoother onboarding. With employees only needing to remember a single master password, they’re less likely to cut corners with weak, reused credentials. The password manager also alerts the company to any accounts compromised in data breaches, enabling immediate action.

As the company grows, a password manager can keep login sprawl in check. HR would have detailed oversight of access permissions, and offboarding would become more efficient. Most importantly, the company would be better protected against the catastrophic leaks that could damage its reputation and bottom line.

3 types of password managers

Not all password management solutions are created equal. There are a few main types, each with their own pros and cons:

1. Cloud-based password managers 

These store encrypted passwords on the provider's remote servers, allowing easy access and syncing across multiple devices. Cloud password managers are highly convenient, but some companies feel nervous about not having direct control over the storage infrastructure.

Pros:

• Access your vault securely from any device or location
• Real-time sync keeps passwords up-to-date everywhere
• No infrastructure maintenance required

Cons:

• Requires trusting the provider's security infrastructure
• Service outages could temporarily limit vault access
• Internet connectivity needed for full functionality

2. Locally-hosted password managers

These solutions let you maintain complete control by hosting the password vault on your own infrastructure, whether on a local device or private server. Some even allow storing individual passwords as separate encrypted files for enhanced security.

Pros:

• Full control over your password storage environment
• Works offline without internet connectivity
• Highly customizable security policies and settings

Cons:

• Requires technical expertise to set up and maintain
• Manual syncing between devices can be cumbersome
• Higher upfront infrastructure costs

Hardware-based password managers

Some high-security password managers require a physical token, like a YubiKey security key, to access the password vault even with the master password. This adds an extra layer of protection, but also extra steps and costs.

Pros:

• Extremely difficult for hackers to breach
• Minimizes damage if master password is ever exposed
• Multi-factor authentication (MFA) built into the core design

Cons:

• Hardware tokens add significant cost per user
• Lost or damaged tokens disrupt access, though most solutions offer backup recovery options (secondary keys or recovery codes)
• Limited support for legacy systems

3 benefits of using a password manager for businesses

Why bother investing in a dedicated password management solution? For most organizations, the payoff shows up in three key areas:

1. Stronger overall password security 

A password manager makes it dead simple to follow password best practices. No more "123456" or using the same password for a dozen different accounts. Employees can auto-generate highly secure, random passwords for every login. Weak or compromised credentials get flagged for immediate reset.

2. Increased productivity 

Think about how much time your employees waste hunting down lost logins, manually typing in credentials, or responding to lockouts and reset requests. A password manager eliminates all that friction with secure auto-fill, self-service resets, and seamless sharing. It's a rare win-win for both productivity and security.

3. Easier access management 

From an IT perspective, password managers provide a central point of oversight and control for your company's sprawling login footprint. You can easily provision and deprovision access, set minimum password strength policies, and monitor password-related risks in real-time. Some can even automate user lifecycle management by integrating with your HR systems.

Of course, not all these benefits are created equal. A password manager with outdated security or a clunky interface can quickly become a liability vs. an asset. To separate the good from the bad, know the key features to look for.

How do password managers work? 4 key features

The best password managers don't just store your logins under lock and key. They work constantly in the background to keep your credentials safe, accessible, and compliant with zero friction for your team. Here's how:

1. Secure encryption 

All your passwords get encrypted both on your device and in the cloud vault using advanced ciphers like 256-bit AES. Your data remains encrypted at rest and in transit. Only you can unlock them with your master password, which the provider never sees or stores. This "zero knowledge" model means that even if a hacker cracks the provider's defenses, your actual passwords remain unreadable. The decryption only happens locally on your device when you authenticate with your master password.

2. Automatic password capture and fill

When an employee enters a new login, the password manager offers to save it. Those credentials then automatically populate whenever that employee visits the site or app again. Most password managers support auto-fill through browser extensions, mobile apps, and direct integrations to make the user experience seamless.

3. Password generation and strength auditing

A password manager removes all the excuses for weak, reused, or compromised passwords. Employees can generate unguessable passwords with parameters around length and complexity. Ongoing auditing flags any problem passwords for immediate updating. Password managers don't just check complexity—they validate credentials against databases of known password breaches (like "Have I Been Pwned") to proactively catch credentials exposed in third-party hacks. This allows the system to alert you when your passwords appear in known data breaches, even if your specific accounts haven't been directly compromised.

4. Centralized access management 

A password manager functions like a smart single sign-on system—employees only need to remember one master password to securely access all their credentials. Administrators can control who has access to what, enforce password policies, and maintain detailed access logs. The system provides granular access controls, allowing teams to customize permission levels for different users and groups. It  enables secure sharing of specific passwords without exposing the actual credentials, and access can be revoked instantly when needed.

The combination of airtight encryption, easy but highly controlled access, proactive security auditing, and effortless oversight is powerful. A well-designed password manager just makes good password habits the path of least resistance across your organization.

How to use a password manager: 4 steps

Ready to roll out  a password manager at your company? Here's a straightforward guide to get you up and running:

Step 1. Choose and install your solution

Select a password manager that fits your company's needs and budget. Install the applications on company computers and mobile devices, then set up browser extensions for Chrome, Firefox, and other browsers your team uses. Make sure you have admin access properly configured from the start.

Step 2. Set up master password requirements

Establish clear guidelines for master passwords: they should be strong but memorable. Consider implementing company-wide requirements for password complexity. Set up two-factor authentication for all users, and create recovery procedures in case employees forget their master passwords.

Step 3. Plan the migration process

Create a simple plan to transfer existing passwords from wherever they're currently stored. Set up logical folders or groups to organize company passwords by department or function. Help employees import their work-related passwords into the system during scheduled training sessions.

Step 4. Train employees and monitor usage

Create simple training materials showing employees how to use the password generator for new accounts. Set up regular security reports to track adoption across departments. Review password health scores monthly to identify weak spots. Create straightforward sharing rules for team passwords, and establish a process to remove access when employees leave.

Top 3 password management solutions

The password manager market is a crowded one. To help jumpstart your evaluation, here's a quick overview of some of the top solutions for businesses:

1. 1Password 

1Password offers zero-knowledge architecture and end-to-end encryption, with robust enterprise features like custom security policies and compliance tools. The platform includes team-specific vaults and advanced permission controls that are particularly valuable for larger organizations. Includes integrations with identity providers, SIEM tools, and developer platforms. 

2. LastPass 

LastPass provides features including 100+ security policies, directory integrations, advanced reporting, and SSO capabilities. Uses 256-bit AES encryption with zero-knowledge security model. It also includes dark web monitoring and security dashboards. When evaluating LastPass, organizations should consider its security history, including the well-documented breach in 2022, and weigh these factors against its robust feature set.

3. OneIdentity 

OneIdentity focuses on enterprise password management with AD integration, self-service password reset capabilities, and multi-domain support. Features include two-factor authentication, policy management, and detailed activity logging. It’s designed for large-scale deployments.

Beyond standalone tools, some integrated HR, IT, and security platforms are also getting into the password management game. Which brings us to one particularly compelling solution...

Streamline access management with Rippling

Rippling is a unified workforce platform that integrates identity, device, and security management into a comprehensive suite. What sets Rippling apart is its native integration of credential management with core employee identity and lifecycle data.

At the heart of this capability is RPass, Rippling's built-in team password manager that gives employees centralized, one-click access to all their applications directly from the Rippling dashboard.

With Rippling, you can automatically provision and deprovision accounts as employees join, change roles, or leave. Credentials sync seamlessly to cloud apps through deep integrations. Access logs tie directly to a user's profile, unlocking rich audit trails and security insights.

Beyond passwords, Rippling provides complete IT security controls. You can enforce multi-factor authentication, deploy endpoint security, and manage all company assets from a single dashboard. It's a holistic approach to locking down your organization's most valuable assets.

FAQs on password managers

Why use a password manager?

Strong passwords are essential for security, but managing dozens of complex passwords is nearly impossible without help. Password managers create and securely store unique passwords for all your accounts while you only remember one master password, plus they monitor for breaches and make it easy to update passwords regularly.

What is the downside of using a password manager? 

The biggest trade-off with a password manager is that you're putting all your eggs in one basket. If your master password is compromised, an attacker could theoretically access all your accounts. However, this risk can be significantly reduced by enabling MFA. Additionally, reputable password managers store only hashed versions of master passwords, making them extremely difficult for attackers to exploit even in case of a breach. Choosing a password manager with rock-solid encryption, security audits, and a SOC2 Type 2 certification helps mitigate this risk.

Is it worth paying for a password manager? 

For businesses, a paid password manager is almost always worth the investment. While a free password manager might work for personal use, business versions offer advanced admin controls, auditing, and support capabilities required for secure enterprise use. Given the potentially devastating costs of a data breach, even a top-tier enterprise password manager is a bargain.

Can password managers work on multiple devices and phone apps? 

Yes, most password managers offer cross-device syncing through browser extensions, desktop apps, and mobile apps. However, it's important to check OS compatibility and feature parity across platforms, as mobile apps sometimes lag behind.

This blog is based on information available to Rippling as of ___PUBLISH DATE___.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.