So you have done your research and decided that a cash balance plan is for you. Your next job is to find a third-party administrator (“TPA”).
But how do you locate a qualified cash balance plan TPA? It may be tougher than you think.
At first glance, you may think that all TPAs are alike. Unfortunately, this could not be further from the truth. While all TPAs will provide you with a plan document and annual administration, not all will offer up front consulting and plan structuring advice.
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Some Background
A cash balance plan is a type of defined benefit pension plan. Participants receive a pay credit based on a percent of the participant’s salary plus an interest credit. It is a great way for owners and key employees to accumulate large retirement contributions and the company gets significant tax savings.
They are popular with physicians, CPAs, attorneys, engineers, and other professionals. These professional groups could have from one to hundreds of professionals included in the plan.
However, there can be different benefit levels established for each one. You could have one partner contribute $200,000 while another partner receives nothing.
The contribution for each partner is based on current and prior compensation. These plans, of course, can be combined with a 401(k) plan to add the discretional deferral option.
What is a TPA?
A TPA is an organization specialized in offering services to other companies relating to retirement plans. Managing plan activities is a hard task for employers.
Therefore, they contract a third-party administrator to handle much of the administrative work so they can concentrate on running their business.
Let’s take a closer look at the services a cash balance plan TPA will provide:
- Initial consultation regarding plan design and financial goals;
- Plan discussion with CPA and financial advisors regarding operational aspects of the plan;
- Drafting all plan documents, including plan summary, adoption agreement and required consents;
- Coordination with actuary to ensure compliance and company goals;
- Planning that allows you and other highly paid employees to contribute at your preferred levels;
- A partnership with your plan advisor to ease and simplify plan operations;
- Assurance that plan costs are reasonable and a valuable investment;
- Plan testing to ensure compliance with ERISA; and
- Filing required 5500 tax returns with the IRS and perform DOL compliance testing.
TPA Administration
But a TPA also provides a valuable service for the employees such as:
- Regular communication about the plan and how it is designed to help them pursue their financial goals;
- Consistent financial education, so they learn how to best manage their plan’s accounts;
- Assistance in coordinating their plan accounts into their overall financial goals;
- Satisfaction in knowing that they are paving the way to retire when and how they want;
- Providing confidence that the company is offer employees a high-quality plan platform that includes regular market reviews;
- Satisfaction that they are empowered to participate in their retirement plan at meaningful levels that are measured and tracked; and
- Certainty that fiduciary liability safeguards are in place and regularly monitored.
But each cash balance plan TPA will provide a different level of service. Let’s take a look at the 3 rules for hiring the right TPA.
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TPA Rule #1: Communication
Communication with your TPA is of utmost importance. You could have the greatest actuary in the world, but if you are unable to communicate and get your issues addressed it could all be a waste of time.
We have seen situations in which cash balance plan documents were drafted. But they didn’t fit the client’s situation. This can be attributed to pour upfront communication.
Certainly the client may be partially at fault for the breakdown in communication. But clients do not understand the plans as well as the TPAs and actuaries.
That’s why it is the responsibility of the professionals drafting the plan to make sure they ask the right questions and get the plan designed according to the clients needs. Most clients just don’t understand the intricacies of the plans when they are being drafted.
Ask the TPA about how your funds are managed. Even though money management is not the job of the TPA, they may have some insight into what other companies are doing.
Look for a TPA who can tailor a cash balance plan to the specific needs of your company. The TPA should be flexible enough to design a plan to fit your employee needs.
This can lower costs as well as improve employee morale. Some TPAs are specialized in one area. Be keen to look for a TPA familiar with your organization’s situation.
Rule #2: Timely Filings
It is critical that all compliance filings are made accurately and timely. We have seen actuaries who simply don’t understand the filing requirements. It is up to the TPA to make sure that the plan stays compliant with the IRS and the DOL.
In addition to timely filing, make sure that all internal plan communications are made as required by law. Cash balance plans need to be strictly monitored and make sure that you don’t run afoul of the contribution deadline or the 5500 deadline.
If a contribution deadline is missed then the contribution is not deductible. In addition, the IRS instigates penalties up to $15,000 for late filing of 5500s.
Ensure that the TPA uses and provides accurate legal information. IRS and ERISA rules and regulations are often complex and not easy for employers to understand. TPAs should keep their clients up to date on government compliance.
Rule #3: Annual Plan Reviews
But don’t think that a TPA is just there to ensure that you’re a compliant. TPAs should provide at least an annual planning review. This way you can ensure that the company goals have not changed and the plan is designed to be consistent with the structure that is in place.
Any annual planning meeting should cover: (1) a review of the company’s financials to determine funding thresholds and limitations; (2) a forward looking review out 3 to 5 years to see if there are any structural design changes that should be considered; and (3) an employee census review to see the funding levels on employees to determine a reasonable mix between owner contributions and those designated for employees.
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Make sure that the TPA practices good management reporting. The TPA should update you on what is going on within a plan through periodic reports. The reports will help the employers make informed decisions about how to steer the defined benefit plan for the best returns on their investment.
Selecting a Cash Balance Plan TPA
After going through a thorough research on the best plan for your firm, you settle for a cash balance plan. Now let’s look for a TPA to help you manage and ensure that the plan gives the best returns.
As a recap, the TPA will provide the following services:
- Provide consultation services on the initial plan design and financial goals.
- Plan and hold discussions with the financial advisors on the operations of a plan.
- Draft all plan documents.
- Consult the actuary to ensure plan compliance and set goals.
- Ensure the plan complies with ERISA and DOL rules and regulations.
- Filing plan tax returns with the IRS.
Don’t be afraid to ask for references from larger TPA clients. Many business owners gladly accept a list of references from the TPA. You could also ask for a list of their largest clients. The clients will clarify their satisfaction with the TPA’s service and any advice they can give pertaining to the TPA.
How to Find a Quality Administrator
Follow these 5 steps to locate a qualified TPA:
- Research and due diligence
Look to professional contacts for referrals. There are also many online resources. But remember – TPAs don’t need a specific license. But actuaries need to be licensed. Make sure to inquire of professional licensing and related background.
Financial professionals are great resources for cash balance plan information. Although some are not up to speed on the complexities, they are often a great starting point.
- Interview your top 3 references
Once you have completed your initial diligence, make sure that you interview them all and receive illustrations. Ask questions regarding plan structure, annual administration and ongoing support. You might find a few differences.
Some TPAs just administer plans and don’t offer up front customized services. Determine what is important to you in the relationship. - Compare fee schedules
Fees can vary widely, and there is no set industry standard. It used to be common to see annual administration fees in the $5,000 range. But fees have come down in recent years. For plan fees that used run as high as $10,000 annually, we would charge around $2,500.
- Do an annual compliance review
Every year, make sure to review your plan with the TPA and other fiduciaries as necessary. You should probably invite your CPA as well. Other parties may point out compliance issues that you have not noticed.
- Fund the plan
Remember that the plan needs to be established and funded before the due date of the income tax return (including tax extensions). Don’t over analyze administrators and ultimately miss the deadline.
The Choice is Your’s
Choosing a TPA should not end when you sign a contract with them. You should give yourself enough time to evaluate and compare what they promise.
| What you want in a TPA 👉 | What you DON’T want in a TPA |
| Reasonable pricing | Poor communication |
| Flexible plan design 👉 | Late 5500 filings |
| Annual plan reviews | Lack of actuary coordination |
| CPA coordination | Low funding levels |
There are many aspects to be examined apart from the ones listed. TPAs play a very important role in the performance of a cash balance plan. It is, therefore, an important decision your company will make when they finally settle on a TPA.
When you consider the cost of a cash balance plan, you realize that you have an important decision to make. There are many quality cash balance plan TPAs available for your selection. Just make sure you ask the right questions and do your own due diligence.
