When a business owner decides to start up a 401(k) or some other type of retirement plan, the inevitable question is "who will take care of the planning and administration?" That's a fair question, but Plan Sponsors will be glad to learn that there are firms dedicated to plan administration. Let's take a few moments to explore everything you ever needed to know about Third Party Administrators (TPA).
What is a TPA and what do they do?
A Third Party Administrator is a company that provides operational services such as employee benefits management for another company. Using Third Party Administrators is now common in many businesses with a growing range of tasks.
What does a TPA do? They work with the Plan Sponsor to ensure the ongoing accuracy of the plan, minimize the time the sponsor has to spend on plan oversight, meet service and compliance deadlines, and coordinate with all parties. TPAs assure the accuracy of the plan and participant data and they perform the required compliance testing and government reporting for the plan. For example, retirement plans are often partly managed by an investment company. Instead of handling all the plan contributions by employees, distributions to employees, and other aspects of plan processing, the investment company may contract a Third-Party Administrator to handle some of the administrative work and they may only handle the remaining investment work and recordkeeping and reporting for participants. The investment provider will typically have a website for the participants as well as the Plan Sponsor and the TPA
The importance of a TPA
Why is having a TPA important? Well, if you've ever needed to change retirement plan providers, you will understand how arduous, disruptive, and time consuming this process can be for both employees and Plan Sponsors. The detailed analysis, plan design, and implementation can be a daunting and expensive process. After your company's 401(k) plan is set up, there's a lot that goes into maintaining it such as monitoring employee contributions, distributions, withdrawals to maintain compliance with plan rules and federal laws. If you hire a TPA to manage your retirement plan, you won’t have to start over just because you change retirement plan providers. Your TPA can assist you in the transition from one provider to the next without any disruption to your plan operations. Additionally, a TPA can handle any changes in employee status: so, if a person gains or loses eligibility to the plan, the TPA will ensure that those changes are reflected completely and accurately.
TPAs are skilled at the following plan design and consultation services:
Determining the optimal plan type
Maximizing employer tax deductions
Maximizing desired participant outcomes
Minimizing costs for starting up and maintaining the plan
Minimizing costly mistakes of poor plan design
Minimizing costly operation errors
Developing a plan that encourages recruitment and retention of valuable employees
Day to day communication
What is the role of a TPA?
Why use a TPA? Well, there could be a number of reasons. As the benefits business continues to become more complex and potential financial repercussions can prove to be expensive, TPAs help to minimize risk and financial exposure for companies. Retirement and benefit plans can be an exceptionally technical subject. Hiring the right TPA is vital for the success of the plan; plus, having a TPA on your side is often more cost-effective than doing all of the administration work in-house, in particular for small and medium-sized companies.
How do you know you have chosen a qualified TPA?
The seal of excellence for TPAs is that they are a CEFEX Certified TPA. The Centre for Fiduciary Excellence (CEFEX) is an independent certification organization that defines a set of best practices for retirement service providers. The best service providers in the country voluntarily undergo stringent, annual CEFEX assessments which verify that they adhere to the established practices and go the extra mile to establish themselves as a firm of credibility and integrity. A CEFEX-certified TPA must document their processes, provide fee transparency, and adhere to the highest industry standards, as measured by the rigorous annual assessments performed by CEFEX. Beyond that, certified TPAs provide support for DOL and IRS audits, protect your plan’s personal and identifiable information, and ensure accuracy and compliance for your plan. With these practices and more, in place, Plan Sponsors can rest assured that a partnership with a CEFEX-certified TPA will alleviate the fiduciary stresses, reduce liabilities, and assist the Plan Sponsor with fulfilling their due diligence obligations. In short, if you choose a CEFEX-certified TPA you can trust that you will be receiving industry-leading care.