What is a Third-Party Administrator?
Many small business retirement plans will appoint the employer as the plan administrator. However, in most cases, and for good reason, the employer will appoint a third-party entity, better known, as a third-party administrator (“TPA”) to perform the duties associated with the plan administrator. By appointing a TPA, the employer can outsource the esoteric day-to-day plan administration functions to a qualified third-party. However, the employer does not discharge liability by delegating plan responsibilities to a plan administrator. In addition, a plan administrator may become a plan fiduciary depending on the discretionary control granted.
Pursuant to the 401(k) plan rules, each 401(k) plan must have a plan administrator. The plan administrator is the person or entity responsible for the day-to-day plan operations and administration. A plan administrator’s day-to-day duties generally involve:
- Deciding when an employee becomes eligible to participate in the plan
- Calculating employee and/or employer plan contribution amounts
- Preparing and filing plan tax forms (i.e. IRS Form 5500)
- Interpreting and explaining plan provisions
- Providing eligible plan employees with notices, information, and relevant plan details
- Calculating the plan benefits to be allotted to each individual
Key Functions of the TPA
Not all TPA companies have the same experience or offer the same pension plan products. It makes sense to work with a TPA company that has the experience with the most popular types of qualified retirement plans, such as Defined Contribution Plans, Defined Benefit Plans, Stock Bonus Plans, Employee Stock Ownership Plan (ESOP), Cash or Deferred Section 401(k) Plan, Target Benefit Pension Plans, etc.
A good TPA will help you and your business pick the most suitable plan for the business owner and the business. In addition, working with a turn-key TPA company that can take care of all the important and complex plan administration responsibilities that are generally required by the IRS and Department of Labor in order to keep the retirement plan to remain in full compliance, such as:
- Plan Customization & Design
- Plan Installation
- Drafting of Plan Documents
- Day-to-Day Plan Administration
- Employee Communications
- Plan Compliance Testing
- Governmental Reporting
- Plan Distributions
- Actuarial Services, if applicable
For most small businesses, working with a TPA that can handle all the IRS and DOL plan administration requirements, as well as take responsibility all required plan amendments, is a major benefit.
For example, if your small business has steady profits and sufficient funds to use for plan contributions each year, and the business owners are older than most of the employees, a good TPA company would have the experience and know-how to have the small business owners consider a defined benefit plan, which would allow the older employees to benefit significantly since the contribution formula weighs greatly on the years left until retirement.
Record Keeper vs. TPA
The TPA is responsible for performing most of the daily aspects of a 401(k) retirement plan. The TPA is so important for the business owner because they make sure that the plan remains qualified and in full compliance under IRS and ERISA rules. They also perform all required administrative functions, and can help customize plan benefits on an ongoing basis to help maximize retirement goals for the business owner and the plan participants.
The primary purpose of a record-keeper is to keep track of the plan money. In essence, the record-keeping company will provide daily plan asset valuations typically through a web-portal or app. In contrast, the TPA firm will handle more of the plan design, annual IRS plan filings, as well as maintaining the plan documents. However, in some cases, one company will perform both the TPA and plan record-keeping services.
However, when it comes to plan customization and administration, the experience and expertise of the TPA you work with will make a real difference; working with the right TPA can help the business owner maximize plan contributions and reduce their tax liability without violating any of the 401(k) plan annual testing rules. Current business owners that have a 401(k) plan or business owners thinking of establishing a 401(k), would be wise to focus on selecting the right TPA before worrying about who will provide investment advisory and record-keeping services
Choosing the Best TPA
Working with a TPA company that is solely focused on plan administration type services is important. Because of the very complex rules involved in the establishment, operation, and administration of employer retirement plans, coupled with the almost constant plan amendments and employee notification requirements, working with a TPA company that focuses solely on plan administration matters often makes the most sense. Using a TPA service from a company that focuses on other primary business services, such as payroll of financial advisory, comes with its disadvantages.
However, for the self-employed or small business with no employees that have a Solo 401(k) plan, using a specialized TPA company is not essential because of the lack of required annual administration requirements. In addition, since the employer remains liable for all plan administration responsibilities, choosing a TPA company that focuses solely on administration and plan-related services is often the smart choice.
