Do you have a succession plan?

Many 401(k) TPAs are small businesses – sometimes just the business owner and a couple of employees. That is actually how Nova 401(k) Associates started in 2000. Nova 401(k) Associates’ founder Karen Smith would occasionally be asked the unpleasant and direct question, “What happens to Nova 401(k) Associates if you are hit by a bus on the way home tonight?”

While small businesses are the backbone of America, a plan sponsor entrusting the compliance of its 401(k) plan to a 401(k) TPA needs to ensure that services will continue and records will be available in the event the TPA owner becomes unexpectedly unavailable due to illness, disability or death. Though not likely, what would happen if the TPA owner became unavailable in the middle of 401(k) testing season or two weeks before the Form 5500 deadline? How bad would the problem be if all of the records were in the TPA’s locked office space, and no one was available to unlock the office?

One solution is to work with a 401(k) TPA who has multiple shareholders, but there are certainly steps that single-owner TPA firms can take to deal with these issues. For example, a TPA owner can have a buy-sell agreement with a qualified key employee or another TPA owner to handle such a contingency. In the alternative, a TPA owner can have a well-documented contingency plan and sufficient funding to keep the TPA firm running while the 401(k) TPA owner’s heirs make other arrangements. Additionally, a small TPA firm can mitigate some of this risk by using technology to ensure that clients always have access to their records.

A plan sponsor will want to ensure that their 401(k) TPA has a viable succession plan. Nova 401(k) Associates has five shareholders, and the average age of Nova 401(k) Associates’ shareholder is just under forty years old. The shareholders have executed a buy-sell agreement addressing the retirement, disablement, or death of shareholders to ensure continuity of services to its clients.