Why You Should Hire a Third Party Administrator for Your Retirement Plans

Is the person running your retirement plan competent? If your 401(k) administrator is an in-house personnel from your payroll company, then the answer is probably no. The 401(k) plan, and other retirement plans like it, is for highly specialized people in the retirement planning industry.

Why?

This is because payroll is entirely different to retirement planning. The former is an automated service while the latter is highly structured.

Errors in payroll can be easily corrected without a need to consult with attorneys or relevant government departments. Errors in retirement plans, however, can cause a domino effect because you need to abide with all the terms of ERISA, the Internal Revenue Code, the Department of Treasury, and the Department of Labor. In this case, reporting to the proper government departments can occur frequently. Some errors can even cause your entire retirement plan to be disqualified.

There have been instances wherein in-house personnel who act as 401(k) administrators run retirement plans the same way they do payroll. If a client were to provide wrong information about highly compensated employees, such as checking everyone as “key” employees, the in-house personnel would just run the tests without ever noticing the error.

The results would show, albeit incorrectly, that the plan was ‘top heavy’. This would mean the employer will have to provide up to 3% compensation for all non-key employees.

A skilled administrator would have noticed the error and would contact the company about the correctness of the information right away. This is why you and the plan sponsor should consider a third party administrator (TPA).

 It may be true that payroll companies provide this service at an affordable price, but the stakes at hand is the quality of your plan.

If you are considering to treat an acne problem, isn’t it more appropriate to consult with a dermatologist than a cardiologist?

Like this analogy, it is important to hire someone specializing in retirement planning as your TPA, because the 401(k) plan is too complex for a jack of all trades to handle.