What TPAs Do
A TPA’s responsibilities include, most importantly, retirement plan design, as well as record keeping, yearly testing to gauge a plan’s compliance with Internal Revenue Service’s (IRS) non-discrimination rules and participant contribution limits, and preparing annual returns and reports required by the IRS.
When it comes to plan design, the goal of a TPA is to maximize a plan sponsor’s tax deductions while increasing plan participant’s wealth.
TPA’s are also fully prepared to handle the complicated mathematical calculations required by the compliance testing outlined by the qualified plan rules. These rules are set in place to ensure that the retirement plan does not discriminate against non-highly compensated employees. Compliance testing recurs on a annual basis, so a TPA will ensure that their plan sponsor submits accurate data, and their plan remains qualified (tax deferred).
All Different Kinds Of TPAs
There are TPAs with thousands of employees and ones with only a single employee, the owner.
Some TPAs handle only large 401(k)s; others only defined benefit plans. Some manage a full range of retirement plans for medium and small companies; others specialize in cash benefit plans.
TPA roles may be split between two providers – one serving as record keeper, processing a plan’s funding and investment trades, while the other performs compliance testing and preparation of IRS forms.
Even if TPA’s are different, the key is finding a TPA that can meets the needs of the organization.
Hire a Good TPA
While hiring a TPA that does good work seems like common sense, there are other certain factors that making finding the right TPA even more important.
A good TPA makes a plan sponsor’s life easier through competent administration, efficient plan design, and administrative expertise. This means the sponsor has more time for other important responsibilities, while the TPA puts the expertise to use.
In most cases, plan sponsors are responsible for a TPA’s errors and could be sued by plan participants and the Department of Labor. This means that it’s even more crucial to find a TPA with their client’s organization’s best interests in mind.
Often plan sponsors hire their payroll provider as their retirement plan TPA – not always the wisest decision.
Because good TPA work has very little to do with payroll. Despite offering the services that are normally provided by a TPA, not many payroll providers are able to perform a retirement plan’s design and more complicated administrative tasks well. In the end, plan sponsors are not getting the level of work that they would from a dedicated, professional TPA.
Don’t Focus on Fees
While a TPA is required to disclose its fees, it’s up to the plan sponsor to check what other TPAs charge to gauge whether their TPA’s fees are reasonable. Regulations require plan administration fees to be reasonable, not necessarily low.
A TPA’s competency is far more important than how much it charges. Many low cost TPAs are low quality, meaning they make administrative errors and don’t have experience in sophisticated plan design. A TPA that is a perfect match for the plan sponsor is worth the fee.
Conflicts of Interest
Some TPAs not only perform retirement plan administration, but also ancillary services such as plan documentation and investment advisory. While having these services combined in one place, this could lead to conflicts of interest.
While many TPAs have ERISA attorneys, there is no attorney-client relationship between them and plan sponsors. If a TPA’s poor plan administration leads to costly compliance fixing, their lawyer’s role is to protect the TPA.
A conflict of interest could also occur when a TPA’s affiliated investment advisory service offers an investment lineup that results in high revenue sharing payments from a mutual fund, for example, to the TPA. Plan participants often suffer in this scenario because the TPA’s focus was on revenue sharing, and not the fund’s potential return.
How to Pick a Quality TPA
While finding the right TPA is a complicated process, here are a few tips that can be used during the decision process to filter out the bad from the good, making it easier to make a choice.
- Ask for references from the TPA’s clients
- Check the credentials of the firm’s top people
- Find out what they know about plan design
- Compare the TPA’s fees to their competition’s
- Make sure the TPA is insured for errors, and check if there have been claims made against the TPA’s insurance or it has been subject to litigation
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