Hiring a TPA: The Partner You May Not Know You Needed

Partnering with a Third Party Administrator (TPA) can be very beneficial to help manage compliance-oriented and day-to-day tasks related to managing a retirement plan. Many TPA’s refer to themselves as ERISA Consultants. 401(k) plan sponsors know that running a plan requires a lot of work, whether it’s seeking answers to participants’ questions or keeping the plan in compliance. 401(k) plans are complicated, and the expertise of a TPA can be invaluable to a plan sponsor.

It’s common for medium and small businesses to work with a TPA firm. They especially dominate in the $5 million and under market. By looking to these firms as consultants with a deep bench and as back-office specialists, it allows plan sponsors to focus on running their business knowing that they have a partner to help them with their 401(k)plan.

What Does a TPA Do?

First, think of a TPA as a designer. Good plan design is the basis of a successful 401(k) plan. They can assist an employer in designing a 401(k) plan so it meets Department of Labor (DOL) and Internal Revenue Service (IRS) regulations. Plus, plan design should seek to meet your company’s goals, whether that’s to increase plan participation, increase participant contributions or maximize contributions to highly compensated employees.

In addition, a TPA is a compliance manager. They can act as an intermediary for the plan sponsor and the recordkeeper that hold the plan’s assets. The TPA will collect information such as an annual census for all employees, company ownership and other details that will help them in performing their duties. The TPA will then use that information to prepare annual tax returns (5500 forms) and perform annual compliance testing.

What are a TPA’s Duties?

As you can see, a TPA firm has its hands in many aspects of plan management. Many plan sponsors may confuse the TPA’s role with that of a record keeper. While they may work closely together, their responsibilities to plan sponsors are different.

Here are some of the more common duties that TPAs perform on behalf of plan sponsors:

• Prepare, amend and restate plan documents
• Assist in processing distributions, loans and QDRO’s from the plan
• Test the plan for compliance with all IRS non-discrimination requirements. Discrimination testing includes actual deferral percentage (ADP) tests (looks at 401(k) deferrals), actual contribution percentage (ACP) test (reviews matching contributions made to the plan) and top-heavy tests (focuses on account balances). And making sure they are not exceeding any limits.
• Calculate employer contributions and forfeitures
• Calculate participant vested percentages
• Prepare annual returns and reports required by IRS, DOL or other government agencies (Form 5500).

Hiring a TPA for Your Plan

How do you pick a TPA firm to work with? TPAs come in a variety of shapes and sizes. This typically includes a TPA’s level of expertise and service level. A plan sponsor needs to decide if they need more hand holding. If so a low cost, low “touch” firm may not be the best fit. Also, look for firms with employees that hold designations from an accredited organization such as ASPPA (part of the American Retirement Association) or NIPA (National Institute of Pension Administrators).

Another factor is fees. These can include an annual base fee, a per-participant fee, and fees for other services. While you don’t want to pay an exorbitant fee amount, sometimes not paying a lot of fees could also signal a red flag. And in the end, you’ll end up paying in other ways for these low costs.

A TPA can be a great partner in your 401(k), along with your advisor and recordkeeper. Selecting a qualified TPA can assist you in making sure the plan will be in proper compliance through the support you receive. This is their area of expertise. As you look to build this relationship, you want to partner with a firm that is committed to working well with all parties. Good communication is key.