Should You Hire a TPA?
Without a doubt, the hardest thing about running a 401(k) plan is its administration. A plan administrator carries the enormous responsibility of making sure that the plan operates smoothly and in accordance with governing laws and rules. For example, the plan administrator is responsible for keeping records, reporting and disclosures, communicating with participants and beneficiaries, and several other important duties. The point being that a 401(k) plan isn’t a “set it and forget it” thing, but requires trained personnel and knowledge to run it.
A plan administrator is specified in the plan documents, and is often a plan sponsor itself.However, many plan sponsors falsely believe that their recordkeepers are the administrators. While recordkeepers do indeed help plan sponsors tremendously with day-to- day operations,recordkeepers are not plan administrators. The goal of the recordkeeper is to safeguard plan assets, track the flow of money going in or out, and know which employees participate in the plan and what investments they own.
Besides tracking plan assets and helping with routine day-to- day operations, there are numerous administrative tasks that you as plan sponsor must do to keep your plan compliant. This is when a Third Party Administrator (TPA) can be of great help.
A TPA is an organization that is hired by the plan sponsor to provide help with plan administration. Specifically, TPAs help with the following major aspects:
Allocation of employer contributions and calculation of participant vested percentages
Amendments of plan documents
Consulting on plan design
Preparation and delivery of required notices and reports
Handling regulatory filings and government compliance (including Form 5500 signing) and checking plan and participant contribution limits
Helping with non-discrimination testing
Preparation of loan and hardship withdrawals paperwork
Plan audit support
Assistance when changing recordkeeper
Conducting enrollment and re-enrollment meetings for new hires or nonparticipating employees
In addition to helping plan sponsors, TPAs can also help plan participants by:
Assisting with distributions upon separation
Assisting with a rollover into the plan
Holding one-on-one meetings to answer plan related questions
Providing financial and debt counseling, to lesser extent
Some TPAs can also assist with investments, including selection and monitoring. These types of TPAs are known as “Producing TPAs” because they serve as both the TPA for the plan and the plan’s investment adviser. However, this is not very common as most TPAs are nonproducing, meaning that they don’t sell any investment products and focus exclusively on administering retirement plans.
So, should you hire a TPA? My answer is yes, you should. TPAs can provide incredible value, and significantly simplify your life as well as reduce the risk of potential oversights due to the lack of knowledge and expertise that many in-house administrators have.
Yet there are a few instances where you can probably skip hiring a TPA. For example, if you have a knowledgeable person who knows the intricacies of ERISA and the DOL regulations, then you may be able to do it on your own. Another reason not to hire a TPA is when your recordkeeper offers a bundled approach, meaning the recordkeeping and administrative services are wrapped together in one package from one service provider. While it may seem easier, simpler, and perhaps even cheaper for you as a plan sponsor (since you will not need to pay a TPA) the burden of plan operation expenses may drop into the laps of your employees. In addition, when working with a bundled service fee provider you usually lose flexibility when it comes to plan design. You’ll also lose the customization and personalization that many TPAs offer.
Whether you decide to work with a TPA or a recordkeeper, you must remember that you won’t be able to fully delegate your responsibilities and just rest on the oars. You still have a fiduciary obligation to understand the functions of other providers you hire, as well as to monitor them, and make sure they do their job in the best interest of plan participants. In the end, it is you who will be held liable for any damages and violations.