Employers of all sizes have learned that offering a retirement plan as an employee benefit sends a message that the company cares enough about their workers to help them prepare for the years when they’ll no longer be working.
In a competitive labor market, helping employees save for retirement can deliver recruiting and retention value, while potentially offering tax savings to the company — depending on the benefit plan.
Managing an employer-sponsored retirement plan can be a complex task, and many companies work with a number of different service providers to ensure proper administration and full regulatory compliance.
Depending on the retirement plan, three key types of services are often needed:
- Investment services
- Recordkeeping
- Administrative services
So, which of these services are typically handled by a third-party administrator (TPA)? When would a company take care of its own administrative and/or recordkeeping requirements, and when should it engage a TPA? Is a TPA a plan fiduciary?
Let’s get answers to some of the most important questions employers ask about the providers that service their employee retirement benefit plans.
How Are Employee Retirement Plans Administered?
Different types of expertise can be required to properly administer benefit plans.
Investment services are often needed for 401(k) and similar plans. They’re typically provided by a financial professional such as an advisor, and involve choosing and monitoring the investment options made available to employees through the plan, to help the employer provide an effective benefit that helps improve employee retirement readiness.
Recordkeeping services entail monitoring participant accounts in terms of balances, investment options, contributions from employee versus employer match, cost basis tracking of company stock, etc.
Finally, administrative services include plan design and creating, maintaining, and updating the plan documents, as well as compliance testing and reporting to government agencies such as the Internal Revenue Service and Department of Labor.
It’s easy to see how each area can impact the other two, and yet at the same time, how each area requires specialization.
What Does a Third-Party Administrator Do?
Whether it’s for a 401(k) plan or an employee stock ownership plan (ESOP), a third-party administrator performs several key functions, including:
- Plan design, documentation, and implementation
- Managing day-to-day plan needs
- Ensuring compliance with Internal Revenue Service and Department of Labor regulations
- Preparing annual forms and reports required by the DOL and IRS
- Repurchase obligation studies to help ensure ESOP sustainability
Administrative Services: Plan Design and Annual Documentation
Working with a TPA from the start brings expertise to major plan decisions, like choosing the right plan type in the first place — for optimal employer tax benefit, employee outcomes, costs, and recruiting and retention value.
An expert TPA can help alleviate headaches associated with major annual documentation and reporting:
- Summary Plan Documents
- Annual valuations
- Participant benefit statements
- Summary Annual Reports
- Completing IRS Form 5500 and related schedules
- Annual audit package preparation for CPA or accounting firm
- Creating required disclosures and notices, and help with distribution
- Updating participants on annual withholding requirements
- Monitoring and reporting for plan distributions
Experienced TPAs Handle Recordkeeping
Many of the day-to-day plan needs revolve around recordkeeping. A TPA works closely with the plan sponsor to ensure accuracy of plan records, and to meet deadlines and requirements for reporting. These tasks can include:
- Employee eligibility
- Vested benefits
- Participant accounts: monitoring contributions, reports, fees, etc.
- Participant distributions
- Loans
- Qualified Domestic Relations Orders (QDROs)
- Required Minimum Distributions (RMDs)
- Employer contributions and calculations
- Employer census review
- Cost basis and segregation of employee share allocations for ESOPs
- Audit support
Do I Need to Work With a TPA?
Some businesses don’t. Instead, internal employees, often within human resources, do much of the employee retirement plan work. Software programs exist to simplify these tasks and processes, but it’s tough to overstate the level of expertise required to ensure IRS and DOL compliance, and as a company grows, it can become even more time-consuming and complex to handle the administrative and recordkeeping responsibilities of your plan.
Is a TPA a Plan Fiduciary?
The TPA serves in an advisory role to the Plan Administrator, who is a fiduciary — but the third-party administrator doesn’t have authority to make plan decisions. Rather, the TPA’s functions and authority are set by a fiduciary.
401(k) and ESOP: One TPA for Both, or an Expert for Each?
According to the ESOP Association, 93.6% of ESOP companies that responded to its survey reported that they offer both an ESOP and a 401(k) plan. Offering employees two retirement plans—one that requires their contribution, and one that doesn’t—can be a valuable recruiting and retention tool in an increasingly tough labor market.
But if your company offers both plans, does it make sense to entrust both benefits to a single TPA in a “bundled” services plan, or to enlist more specific expertise for each plan?
Naturally, there are pros and cons to each approach. Take a detailed look at the differences when you download our free guide, Separate or All-in-One TPA for ESOP and 401(k): Which is Best for You? Click the link below to claim your copy today.
