A financial advisor goes out to a small business owner and presents three options for a 401(k) record-keeper. He talks about each of the record-keeper’s due diligence on the funds, the investment fees, the enrollment material, and the website. There is a lengthy and robust discussion about the pros and cons of each record-keeper. At some point in the process, the financial advisor explains that a third party administrator (TPA) will do the plan document, Form 5500/Form 5500-SF, and the IRS-required nondiscrimination testing. Usually the time spent on the choice of TPA is minimal, but sometimes a representative of the TPA attends the meeting.
How did that 401(k) TPA come to be proposed to that particular business owner? Did the financial advisor complete due diligence on multiple third party administrators and choose the TPA best-equipped to meet that particular business owner’s needs? That certainly happens sometimes, but it is usually not nearly that scientific. In some cases, the financial advisor has a single TPA he prefers and whom he has used for years. In other cases, the record-keeper dropped a fee sheet into their proposal for a TPA without consulting the financial advisor at all.
Did the record-keeper complete due diligence on the TPA’s in their TPA database? Did they match the TPA to the client? Most record-keepers complete at least some minimal due diligence when a TPA is added to their database, but in most cases, the scope of the due diligence is extremely limited, and frequently the due diligence is not updated. As far as the record-keeper’s selection of TPA, sometimes there indeed was a real effort to match the business owner’s need to the appropriate TPA. In other cases, the record-keeper’s recommendation may be influenced by their preferred TPA relationships. Sadly in some cases, the record-keeper’s selection may be influenced by their desire to sell a minimum number of cases with multiple TPAs, and they need to place plans with a certain TPA to get them to that minimum.
The choice of 401(k) TPA does matter. The TPA works with the client on important compliance issues, and when the relationship is bad, the business owner does not get the advice and services he needs in a way he can understand. Some plan sponsors only get concerned about the selection of the TPA after there has been a meltdown with their TPA. At the point of meltdown, the business owner is furious, and the financial advisor looks bad for recommending the current TPA. Nationally, there are a lot of great TPAs. Business owners need to ask questions to make sure that they are getting one of these great TPAs and that the specific TPA’s personality is a good fit for the business owner’s personality and needs.
Nova 401(k) Associates is pleased to present an article series on questions to ask a 401(k) TPA.
Please check back often for additions to this series. Read more articles in this series: