#1 Rule to Selecting the Best Defined Benefit Plan TPA


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?

What is a 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. Let’s get started!

Defined Benefit Plan TPA: Responsibilities

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.

  • 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 including advising on the differences between cash balance plans, 401ks and other qualified plans.

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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.

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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.

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.

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.

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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.

Choosing a Defined Benefit Plan TPA

The five steps to finding a qualified TPA:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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 TPAPoor TPA
Transparent pricing scheduleLacks experience to customize plan
Free illustrationsFailure to provide Schedule SB
Experience with custom designPoor communication
Timely financial reportingLate 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.

Paul Sundin

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2 thoughts on “#1 Rule to Selecting the Best Defined Benefit Plan TPA”

  1. 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?

    Reply
    • 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.

      Reply

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