Many companies who set up retirement plans can select from a variety of third-party administrators (TPAs). But what do they actually do and how do you select the right defined benefit plan TPA?
TPA actually stands for Third Party Administrator. TPAs are companies that provide administrative tasks for retirement plans, such as defined benefit plans.
In this article, we will discuss the process of selecting the right TPA for your company. We will point out a few tips and help you navigate pitfalls.
What is a Defined Benefit Plan TPA?
TPA stands for Third-Party Administrator. TPAs are companies that perform administrative tasks relating to retirement plans. They are responsible for providing compliance services and filing required IRS forms.
What is a defined benefit plan?
A defined benefit plan is a type of retirement plan in which an employer promises to pay its employees a specific amount of income upon retirement based on a predetermined formula that considers factors such as the employee’s years of service, salary history, and age.
A defined benefit plan works by providing employees with a retirement benefit that is based on a formula set by the employer. This formula typically considers factors such as the employee’s years of service, salary history, and age at retirement.
The amount of contributions required depends on various factors, such as the size of the plan, the expected investment returns, and the demographics of the plan participants.
The employer is responsible for contributing to the plan and managing its investments to ensure that it has enough assets to meet its future obligations. Unlike defined contribution plans such as 401(k) plans, where the employee bears the investment risk and the ultimate benefit depends on the performance of the investments, the employer bears the investment risk in a defined benefit plan.
Once an employee retires, they begin receiving their defined benefit payments for the rest of their life. The amount of the payments is typically fixed and guaranteed by the employer, regardless of how the investments perform. This makes defined benefit plans different from defined contribution plans, such as 401(k) plans, where the ultimate retirement benefit depends on the performance of the investments.
What does a third-party administrator do?
The TPA is normally hired by the plan sponsor (usually the company establishing the retirement account). There are many tasks associated with managing a retirement 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.
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.
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- 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.
Plan Design
A good TPA will first examine the goals of the business owner and examine the pros and cons of different plans. This would include 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.
Administration
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.
Is a Cash Balance or Defined Benefit Plan Right For You?
Compliance Filings
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.
Roles and responsibilities
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 a given employer and their plan participants.
Employers’ administrative and investment duties and their fiduciaries are numerous and complex. Failure to comply with ERISA’s rules can result in penalties, government audits, and even liability. Fortunately, with help from advisors, ERISA can be a map to compliance rather than a trap for the unwary.
| Plan Pros ✅ | Plan Cons ❌ |
| Tax-deferred growth | Mandatory contributions |
| Flexible contribution levels | Expensive to administer |
| Front loaded funding | Conservative investment mix |
| Allows for QBID or section 199A | Complex rules |
The most important aspect of plan design is the benefit formula. The other features of the plan, such as early retirement provisions, distribution options, and definition of pay and service, are less important when comparing different plans.
Often a plan sponsor is interested in what benefit levels competitors offer. This is essential to benchmark the company’s overall employee compensation package.
When comparing benefit levels between different plans, it is often helpful to create benefit illustrations. These illustrations compare benefit levels over a career between other plans. This can be very helpful in educating the plan sponsor.
Sometimes the employer might be interested in changing the plan design. These benefit illustrations provide an excellent way of communicating information relating to benefit levels and costs to the plan sponsor.
The importance of a plan actuary
An excellent way to learn the concepts of the actuarial valuation is first to understand the concepts of projecting benefits. When projecting benefits, you make assumptions about future salary increases and changes to the taxable wage base (for integrated plans).
Usually, you assume the employee will continue to work, won’t die before retirement age, and won’t become disabled (we call these pre-retirement decrements) for these illustrations. By comparing current and retirement age benefits, you can easily see the level of benefits and the relative cost between various plans.
How to select a defined benefit plan TPA
The five steps to finding a qualified TPA:
- Determine if TPA can provide custom plan design
Look for a TPA capable of tailoring a defined benefit plan to your company’s specific needs. The TPA should be flexible enough to design a plan to fit your employee’s needs. This can help cut costs as well as improve employee satisfaction. Some TPAs focus on one area. Ensure you look for an administrator familiar with your organization.
- Ask for references
Check references from some of the TPA’s larger clients. Normally, you can request a list of references that the TPA has. You could change this and ask for their largest clients, then ask them about the TPA. You can also look at reviews and references from financial advisors and CPAs.
- Ensure that the TPA uses accurate legal information
IRS and ERISA rules and regulations are sometimes complex and challenging for employers to grasp. TPAs must keep clients up to date on government compliance. TPAs receive frequent newsletters from SPBA informing them of new laws and compliances to be followed. They also have an annual meeting to discuss government decisions and how they affect their clients.
- Decide how funds will be managed
It is a requirement of ERISA for employers to safeguard plan assets. TPAs should help on this aspect and ensure that assets are not misused and that they give optimum returns to the plan. They should also assist in detecting and preventing fraud and abuses. TPA offers a Statement on Auditing Standards (SAS 70) report, which are the tools that will help employers and participants with any violations or frauds on the plan.
- Coordinate plan reporting
Ensure that the TPA practices good management reporting. TPAs should update you on the plan through at least quarterly reports. The reports will help the business decide how to steer the defined benefit plan for the best returns on their investments.
| Quality TPA | Poor TPA |
|---|---|
| Transparent pricing schedule | Lacks experience to customize plan |
| Free illustrations | Failure to provide Schedule SB |
| Experience with custom design | Poor communication |
| Timely financial reporting | Late filing of 5500s |
Bottom Line
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.
I know these plans are more expensive, but just not sure if the cost justifies the contribution level. My 401k is with Vanguard and I don’t pay anything for it, but I am limited with how much I can put in. Just not sure if the added fees are worth it?
Hi Donald – These plans are more costly, but at least our new plan set up is only $990. You can keep the 401k that you have with Vanguard and use one of our defined benefit plans in addition. The reason you would want to do this is if you are looking to get $75,000 plus into retirement annually. Then usually the cost makes sense. But if you want to get just $50k or less into retirement then I would just stick with the 401k plan that you already have. So basically the higher cost make sense if you want to get more into retirement. If not, stay with what you have.