It’s a safe bet that your smaller-plan clients don’t want to be retirement plan experts. A logical solution? Hire a third-party administrator.
Jim Racine, vice president of Ascensus TPA Relationship Management in Fort Wayne, Ind., observes that employers want to make their lives easier and are willing to pay for that aid. TPAs capitalize on that trend by offering full and limited services and payroll assistance.
In a full-service model, the TPA steps in as the plan administrator and handles many administrative tasks other than vendor selection and fund lineup, he explains. With limited services, the TPA fully handles loans, distributions and hardship approvals only. If the TPA also provides payroll assistance, the plan usually selects the payroll provider, but the TPA covers other administrative chores. These tasks may include adding new enrollees to the payroll file, adding loans and removing people with loan payoffs, updating contribution rates and transmitting the payroll file to the recordkeeper; Racine says via email.
The TPA industry is evolving, he adds. With the rise of cash balance plans and individual defined benefit plans, TPAs are hiring actuaries, hiring other firms to provide them actuarial services or buying firms with actuaries to expand into this marketplace. Regional and national TPAs are growing by acquisition, with Ascensus seeing up to five acquisitions reported of each month from as many as four firms doing acquisitions.
Finding the Right TPA
Plan sponsors can choose from local, regional and national TPAs; advisors and consultants can help them identify prospective hires. Getting a good fit also benefits the consultant, according to Kris Tower, CFP, AIF, with American Portfolios Denver in Denver, Colo. “If the plan sponsor has difficulty with a TPA, the first person they contact is me, the advisor,” he says. “The first person they blame is usually me, the advisor, since the advisor is usually bringing the TPA to the plan sponsor. A good TPA may occasionally win me business, but a bad TPA will get me fired every time.”
Tower reports that all his small business plans work with TPAs; the plans’ smaller sizes prevent them from working with larger TPAs or integrated service firms. “We don’t deal with the very large, multimillion-dollar plans where you tend to see more of the TPA and the recordkeeping functions incorporated together,” he says. “At the $3 million or $5 million mark, it’s more prevalent, but there are a lot of companies that won’t entertain a plan below $3 to $5 million using the in-house solution.”
In Tower’s experience, the key to evaluating a TPA is discovering what the plan sponsor will experience in working with the TPA. Fees are important, but the actual administration is the key for a successful relationship, and cost is usually the last consideration.
He reviews the following factors when evaluating TPAs:
- What is the back-office support like?
- What is the transition team like?
- What is the turnaround time for processing participant requests?
- Does he have one dedicated service coordinator for all of his plans with the TPA?
- Does he have access to that person's manager if needed?
- Do they handle many plans that are similar to the plans he advises?
- What is the employee and plan turnover at the TPA?
- Has the TPA’s ownership structure been stable?
Phillip Cook, CFP with Mogul Wealth Management in Manhattan Beach, Calif., estimates that retirement plans comprise about one-third of his business and roughly 90 percent of those plans use TPAs. In particular, plans that want a customized design instead of a prototype will require a TPA, he says.
Cook generally prefers to work with a local TPA for his small business clients. “When I‘m dealing with my customers, self-employed business people, I find that a local TPA is generally the best answer,” he says. “There’s no advantage I can find to working with anyone bigger [and there is a] possible loss of personal service.”
Few if any employers know what a TPA does; why they’re necessary and why what they’re required to do is complicated, says Cook. He suggests that advisors consider the following evaluation points for TPAs:
- Cost is an issue with almost all business owners and a good TPA will suggest strategies to keep the employer’s costs down.
- Is the TPA responsive to the advisor?
- Do they file IRS and DOL returns on time or do they always request an extension of time to file?
- Is the TPA well versed in multiple types of plans and what can be done to lower costs with each type?
- Does the TPA handle both defined contribution and defined benefit plans?
- Is the TPA willing to spend time to educate the advisor, when needed?
- Do they communicate complex issues clearly and plainly?
- Is the TPA diligent or do they tend to brush over details?