Is the TPA financially viable?

Running a non-producing 401(k) TPA is usually considered to be a low-margin business.  The average revenue per client tends not to be all that much, and there is a lot of work to be done for that revenue.  Many 401(k) TPA owners grew to be owners of TPA firms after years of working on the technical compliance side of the business.  Fifteen or twenty years of 401(k) compliance experience does not  necessarily prepare someone to run a TPA business and deal with the financial pressures of meeting a bi-weekly payroll while serving clients.

In low-margin businesses, there just is not a lot of cushion if bad decisions are made, and unfortunately, sometimes a 401(k) TPA runs into financial trouble.  While a plan sponsor can generally replace a 401(k) TPA if he or she begins having problems, in some extremely rare cases it is possible that important deadlines may be missed or records may not be available if a 401(k) TPA shuts its doors overnight.

Most 401(k) TPAs are privately held and may not be willing to share their financial statements, but it is still possible to do some due diligence on the financial viability of a 401(k) TPA.

  • Fees that are substantially lower than the prevailing market fees can be an indication of an issue.
  • Erratic billing and collection practices may be an indication of financial issues.
  • High staff turnover among administrators may be an indication of financial issues.  High turnover could indicate a serious issue, like the 401(k) TPA having trouble making payroll, or a more subtle payroll issue such as a 401(k) TPA’s inability to pay competitive wages.
  • Sometimes a 401(k) TPA’s financial issues are well-known throughout the local 401(k) industry.  While it is not prudent to rely on unsubstantiated gossip, sometimes making some simple inquiries will give hints as to whether or not further research is requested.
  • In some cases, there are public records available indicating liens and bankruptcies.

Nova 401(k) Associates has been in business for over ten years.  Each of five shareholders receives ongoing education on business ownership including financial planning.  Nova 401(k) Associates maintains a cash reserve and a credit line for unplanned contingencies.