Last month we explored two of the most common types of plan providers, each having their pros and cons as they’d relate to any given plan. However, as we discuss plan administration, I want you to bear in mind this singular truism – a bad or even no plan administrator (like a TPA) can, and often does, cost you far more than an excellent one.
The role of the administrator is to properly design the plan for the sponsoring business, maintain it’s ongoing functions (short of offering investment advice – that’s next month), file annual reports such as returns to the IRS, keep the plan compliant and up-to-date with the ever-changing laws that govern such devices like ERISA and the Pension Protection Act, and defend the plan in a court of law if needed.
Now that may sound like a short and simple list that can be handled by HR staff. Uhhh, no. Has it been done like this by some? Sure. Do I suggest you try? Nah-uh. This is an arduous and time consuming process that is truly best left to the dedicated experts. With rules and regulations constantly moving around, it’s important to have someone whose sole mission it is to keep up with Washington DC. This is why it’s critical to use the services of a Third Party Administrator (TPA). A good one of these will cost extra, but the money you’ll save with a superior plan design and the liability you’ll reduce pays for it in multiples. TPAs will bear the heavy loads that can, and too often do, weigh down HR staffs with cumbersome paperwork and extra tasks that prevent them from performing their regular roles efficiently.
Plan Design – To Match or Not to Match…That is the Question.
There are a lot of small companies out there I’ve run across that have put off sponsoring a plan because they don’t have the extra capital to do matching. When I consult with these clients, my initial response is, “Okay. Don’t.” They usually look very perplexed at this point until I explain that there is no regulation that demands some sort of matching on a 401k plan. You can set one up and just let everyone contribute from their own paychecks via payroll deduction. If the owners/executives wish to make a profit sharing to their accounts, for example, then the ERISA laws would require them to also make contributions to other eligible employees as well. Again, good TPAs can help you set this up correctly.
There’s also a question of what type of plan to use, which is too many to dig into here, but know that a TPA building a program around the right plan is key to survival and success.
Ongoing Administration
This is complex web of law, regulation, filings, forms, tax returns, etc… Let’s cut past the minutia and confusion and use a real life example. Fifteen years ago it was common practice for a business to use two plans (like a 401k and a Money Purchase) because laws at the time only allowed certain contribution amounts into a 401k, thereby necessitating a second plan to reach higher deferral limits. Back in 2001 as part of the Bush Administration’s tax relief package, the limitations were lifted and having 2 plans was no longer necessary. Almost immediately, companies started dropping their Money Purchase Plans (MPP) for 3 reasons: 1) No longer needed. 2) Very expensive to administer. 3) Big financial liability for the plan sponsor. Due to additional actuarial calculations and the legal requirement to fund these plans each and every year without fail (bad economy or not), these things were well to be rid of. Now you could put all those same deferral dollars into the 401k, cut your administration costs by half or better, and eliminate forced contribution liability for the company.
We took over a plan recently that was more than 7 years overdue for a total redesign and a new TPA. The old administrator still had a Money Purchase Plan on top of the 401k Profit Sharing plan, and it was costing the sponsor nearly $15,000 a year with about 50 employees. We brought in one of our outside TPA partners to propose a radical redesign and after some diligent work, the TPA came up with a new program that offered more flexibility, less liability, and all for about $12,000 less per year (in some part because it involved eliminating the Money Purchase Plan, which should have been done 7 years earlier by the other TPA). Oh, and in this particular case, the owners had to take refunds every year on their contributions because the plan wasn’t designed properly for a business like theirs where there is a high disparity in incomes from those at the top to those at the bottom. The new TPA fixed that problem very easily in the plan redesign.
So there you have it. The right plan design and simply keeping up with current law saved this company more than $10,000 a year in fees alone and alleviated them from the $100,000 a year liability of the wrong plan design by current measures.
Next month – The Role of the Financial Advisor, Education, and Communications.