The world of 401(k)s and what goes into them can be confusing for participants and plan sponsors alike. That’s why, as a plan sponsor, it’s important to have the right team to guide you and make sure you’re doing right by your employees while also ensuring you’re making the best choices for you.
To help you get a better understanding of how having the right team can benefit you, I enlisted the help of Doug Hoefer for episode 49 of the Retire Right podcast. I’ve worked collaboratively with Doug on numerous 401(k)s, and he has over 20 years of experience in the retirement plan industry. Doug now works to educate investment advisors on the best practices of retirement planning and also helps them with plan design, plan analysis, and vendor selection.
Doug shared a lot of helpful information about the world of TPAs, 401(k)s, and what plan sponsors need to know, and today, I’m outlining some of what he shared. Read on to find out more!
What is a TPA?
There are usually three components within a qualified plan:
Record-Keeping — someone who tracks participant data and provides the interface where participants can log in and look at their accounts, move investments, and more
Investment Advisors — like us at Heller Wealth Management
TPA stands for a third-party administrator. There are several types of TPAs out there, but we’re mainly focusing on TPAs for qualified retirement plans. These TPAs are responsible for the design of the legal plan documents, the annual compliance that’s required for plans, as well as any required government reporting. TPAs essentially make sure that plans operate within all the regulations they’re subject to by the IRS and Department of Labor.
To include all three of these aspects in your plan, you can either go with a bundled service provider or an unbundled service provider. With a bundled service provider, you get all your record-keeping and administration functions in one place. However, with low bundle providers, services like administration and record keeping are not their core competency, meaning they often won’t go above and beyond to make sure you have a properly designed plan that’s working efficiently on an ongoing basis.
On the other hand, there are unbundled solutions, which give you specialized services because your record-keeping service provider will just solely focus on record keeping, just like your TPA will solely focus on the plan design, compliance plan, and document of the plan.
What TPAs Can Help With During the Planning Process
There are several ways you can design a qualified plan, and there are many restrictions and compliance tests within 401(k) plans that can directly impact business owners and those they compensate. The key is to take the time and work with an advisor who is partnered with a quality TPA so you can effectively consider different profit-sharing formats that fit your budget while also abiding by all relevant regulations.
Depending on the design and the objectives of a business owner, choosing the right profit-sharing formula can have a substantial impact on your budget for the plan and can also ensure that your contributions are going to key people while saving thousands of dollars.
When it comes to compliance tests for plans, some of the tests that plans go through include the average benefit test, the average deferral percentage (ADP) test, and the average contribution percentage test. These tests evaluate contributions that go into a plan to make sure they’re not in favor of highly compensated employees or business owners.
Another test that can really impact a plan is the top-heavy test. When 60 percent of planned assets are in favor of key employees, like business owners or officers, the plan is considered top-heavy. There’s isn’t a penalty for this, but unlike the ADP test where you can take money out of the plan to satisfy the test requirements, with a top-heavy plan, you have to put money in on behalf of the non-key employees to fix the problem.
Another big area where Doug sees a lot of errors is not making contributions on a timely basis. Once you withhold money from plan participants’ wages, they have to be within the trust within seven business days. Another error is not letting people participate in a timely manner by letting them know as soon as they’re eligible for the plan.
There are also several other operational things that have to be looked at, like required minimum distributions and making sure they’re being processed and are timely. These are the kinds of things a quality TPA will look out for on an ongoing basis and will help educate plan sponsors on so they can avoid these errors.
Plan Sponsor Responsibilities
One thing that many people don’t realize is that plan sponsors are actually considered a fiduciary and therefore have certain fiduciary requirements. A fiduciary is someone who has to act in the best interest of the plan participants, regardless of how it impacts them. Therefore, if you’re looking solely at fees and costs when hiring a service provider, it’s a fiduciary breach. You have to take into account the services you’re providing to make sure it’s a good decision on behalf of the participants that you are sponsoring the plan for. You can still consider fees, but not just fees alone.
It’s also worth noting that no matter what a plan sponsor does, there’s no way they can fully relieve themselves of all fiduciary liability. Even if they hire a 338 advisor and 316 plan administrator, they’re still responsible to monitor those providers and make sure they’re providing the services they promised and to make sure they’re doing it at a fair price.
To help keep all these things in mind, Doug has actually developed a checklist for plan sponsors and advisors to use to vet vendor partners. This checklist includes what questions you should be asking (like what are their service guarantees, what are their fees, how are they paid, etc.), so plan sponsors or advisors can vet their vendor partners with as much information as possible.
If you’d like to learn more about Doug and the services he provides, be sure to reach out to him at https://www.dwc401k.com/contact or give him a call at 651-204-2600.