Changing your Third-Party Administrator (TPA) for your defined benefit or cash balance plan can be a major task. It involves the transfer of plan documents along with new processes, some of which can be customized to your plan structure.
The focus of any TPA transition should be to comprehensively and as seamlessly as possible transfer your records and functions from one provide to another while minimizing disruption to your plan participants.
This post will provide you with support if you’re contemplating the transition to a new TPA. Let’s dive in!
Some Background
Transferring the administration of a defined benefit (DB) plan to another third-party administrator (TPA) is a process that requires careful coordination, documentation, and due diligence. Business owners may consider switching TPAs for reasons such as improved service, lower fees, more robust technology, or a better alignment with their retirement plan goals.
The transition typically begins with selecting a new TPA that has experience handling defined benefit plans and is well-versed in IRS compliance, funding requirements, and actuarial services. Once selected, the new TPA will typically request plan documents, prior valuations, participant census data, and trust statements to conduct a preliminary review.
The outgoing TPA should be formally notified of the change, and a timeline should be agreed upon to ensure a smooth handoff. While there’s no official IRS requirement for a specific process to switch TPAs, it’s considered best practice to have a signed engagement letter with the new TPA and a clear termination agreement with the prior administrator. This helps prevent lapses in required filings, such as the Form 5500 or annual actuarial certifications.
Transition Preparation
During the transition, the new TPA will review the historical data for consistency, reconcile funding schedules, and confirm that the plan remains in compliance with contribution and benefit limits.
- TPA Notification – The first step in transition is for the plan sponsor to provide proper written notification to the TPA(s). Most contracts will have a Termination Section outlining the terms and process for notification.
- Transition Meeting and Plan – Initiate meeting with your incoming provider as soon as possible to develop a transition plan and to address the details of your unique plan services and requirements. The incoming provider will need this information to ensure that they capture all of your special requirements.
- Plan Sponsor Transition Responsibilities – The plan sponsor should be prepared to take on certain responsibilities during the transition, even though the incoming TPA will be the primary driver for much of the plan transition work, because the provider will not be as well versed in some of your unique requirements and operations.
- Incoming TPA Responsibilities – The TPA is responsible for creating and executing a transition plan.
- Outgoing TPA Responsibilities – A successful transition requires the support of the outgoing TPA. Your outgoing provider should be engaged and responsive and understand that their active cooperation will help sustain their reputation in the marketplace, as well as benefiting the plan and its participants.
- Participant Communications – Early and informative participant communications should be a priority for a successful transition process. Changes of this magnitude can be disturbing to participants, so the more information they have and the earlier it is communicated the more you can help them navigate the process successfully. Communications should disclose all material information that is required to be provided or may impact a participant’s account and engage the participant in ways that promote awareness of the most essential pieces of information.
- Written Materials – The design and content of your written communication materials will likely change with your new TPA. The transition provides an opportunity to refine and improve your materials.
- Web-Based Communications – Special customized web features and a customized look and feel may be part of the incoming TPA’s services; enhancements in particular should be highlighted for participants.
Required Plan Documents to Review
The first step is for you to gather the following documents. Here are the required documents that most new TPAs will ask for:
- Plan Adoption Agreement with any amendments
- Summary Plan Description, if available
- IRS Favorable Determination Letter, if available
- Schedule SB for prior two years
- Submitted Form 5500 and Attachments for the prior 2 Years, if applicable
- Actuarial Valuations for the last 2 Years
- Year-End Statement of Plan Assets (Investment Account) for the last 2 Years
- Compensation History for ALL employees for the last 2 years
- Current Employee Census for the prior 2 years
- Sample Benefit calculation, if available
Please note that we will require the actuarial reports for the two plan years immediately preceding the year in which you want to initiate the takeover of your plan.
Once received, we will begin a review of the documents with our actuaries. This review can take up to 10 business days. Once it’s complete, we’ll follow up with an update and outline the next steps.
Plan Transition Process
- Administrator and Payroll File Testing – During a transition, data will flow from your former to new administrator, and you will be required to establish new data exchanges between your employer payroll system and new provider. Below are specific data points to which an administrator should pay special attention during a transition:
- Loans
- Brokerage Accounts
- Pre-tax and After-tax (Roth) Contributions
- Managed Accounts
- Required Minimum Distributions
- Beneficiary Records
- Investment Selection: Mapping vs. “In-Kind” – If your change in TPA also involves a change in investment management, plan sponsors may seek the support of an outside consultant. The plan sponsor should also review its Investment Policy Statement (IPS) to make sure all planned changed are in compliance with the IPS, or determine if any amendments are needed to the IPS. Stable Value/General Account changes will generally require special transition considerations as there may be limitations or consequences applying upon the liquidation of assets.
Plan Transition Timing
All of this preparation and planning comes to fruition at the point of actual plan transfer to the incoming TPA. The outgoing record-keeper will usually impose a “black-out” period before the plan transfer in order to prepare for the successful transition of plan data. It is important that this blackout period be communicated to participants as clearly and as early as possible and allow for the potential need to address missing information or resolve data reconciliation issues.
New Administrator Questions
A new administrator will likely want to ask some questions of the client such as the following:
- What is the current funding status of the plan? Underfunded, on target, overfunded, or substantially overfunded?
- Are there any compliance issues?
- What has been the plan’s investment performance?
- Is there any reason why we should not take this plan over?
Final Thoughts
A successful TPA transition ensures that plan administration continues seamlessly, compliance is maintained, and plan participants remain unaffected by the behind-the-scenes changes. Most importantly, the new TPA should take ownership of all future deadlines and be proactive in advising the plan sponsor on contributions, funding strategies, and long-term plan maintenance.
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