Many companies who set up retirement plans can select from a variety of third party administrators (TPA). But what do they actually do and how do you select the right defined benefit plan TPA?
A defined benefit plan TPA is a company that is hired by the plan sponsor (usually the company establishing the retirement account) to run many of the administrative tasks associated with managing the plan.
These tasks often include:
- designing the plan document;
- maintaining and updating the plan;
- administering loans;
- processing distributions;
- completing non-discrimination testing as required;
- calculating employer contributions and any forfeitures;
- determining employee vesting percentages;
- completing annual reports; filing Form 5500; and
- maintaining compliance with the IRS and Department of Labor.
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Defined Benefit Plan TPA: Responsibilities
The final piece of the puzzle, finding the right TPA for a defined benefit plan, is to analyze the support services and feedback of previous customers. Here are some essentials to consider:
- Back-office support
- Average turnaround time for participant requests
- The efficiency of the transition team
- Stability of the TPA’s leadership
- Dedicated plan manager
- Response time for emails or phone calls
- Service guarantee associated with the timing and accuracy of the rendered services.
The second part is due diligence. Find out the fee schedules, revenue-sharing activities that a TPA might be involved in.
- Speak with at least some of the older clients of the firm/individual.
- Find out the general feedback, both online or offline.
- Seek the opinion of your financial advisor.
- Ask the TPA about any negative experiences and the underlying problems.
A good TPA will first examine the goals of the business owner and examine the pros and cons of different plans. This would including advising on the differences between cash balance plans, 401ks and other qualified plans.
They can assist with identifying benefits and tax savings opportunities. The TPA has a responsibility to gather facts about the company and it’s employees. Discussions with investment advisors and the company CPA can also follow.
The TPA will often act as a consultant upfront and provide the employer with a list of plan designs for the company to review. Quality plan design is one of the most important functions of the TPA. In this case, the TPA needs to be a good listener.
Operational issues such as hardship withdrawals, eligibility requirements, participant loans, employer matching or safe harbor contributions, and vesting schedules, all have a significant impact on plan design.
Handling the retirement administrative process is key to the success of the TPA. This includes first gathering the previously filed tax returns and valuation reports, maintaining the plan documents, coordinating any asset transfers to a new custodian.
The TPA will assist the custodian with employee education and enrollment meetings. TPAs will often work with the record keeper and custodian to communicate the details of the plan to employees.
TPAs will also be involved in calculating participant vested balances, coordinate distributions, determine contribution limits, prepare any compliance notices that the company must distribute to employees.
On an annual basis, the TPA will perform compliance testing, prepare and review valuation reports, along with completing and filing Form 5500 and any other DOL filings.
What Do Defined Benefit Plan TPAs Do?
Aside from all the administrative and compliance tasks, the TPA should assist clients in determining what type of plan is right for them and help them maximize the advantages of the plan. The TPA can review plan flexibility and provide a personal service to the company.
First and foremost, a good TPA is experienced in solving plan problems and compliance issues. A high level of specialized experience is critical to the company. Ultimately, it can result in big savings for an given employer and their plan participants.
Employers must understand that regulatory violations could be quite expensive, and the right TPA can help you operate within the legal carpet while providing financial certainty to your employees. Fees shouldn’t be the primary factor when choosing a TPA; instead, figure out what kind of professional do you want to work with, especially in the event of a government audit.
Whether you have a defined benefit plan or a 401k plan, the TPA is critical to your success. Make sure you select a TPA that has the required experience for the plan you select.