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August 26, 2024

Outsourcing Your 401k Plan

Outsourcing the Plan

Employers recognizing, they lack the knowledge necessary to manage 401(k) plans outsource their plan to professionals. We are known as Third Party Administrators or TPAs. The retirement plan industry has investment companies, benefits companies, actuaries, accountants, lawyers, third party administrators, banks, and trust companies providing services to 401(k) sponsors (employers). As a group, providers of retirement plan services are referred to as “providers”.

To help you maintain a 401k or other company-sponsored retirement plan your starting point is the TPA along with your trusted financial advisor. They will help you manage your plan and make it turnkey for busy employers.

Here are most of their roles and responsibilities.

Plan design and consulting,
Investments,
Record keeping for the investments,
Benefit statements & disclosures for participants,
Legal plan documentation,
Government compliance tests,
Distributions to departed participants,
Enrollment assistance,
Employee education, and
Annual report/return Form 5500.

Determining the best provider(s) for your company can be challenging. You will find that a 401(k) plan is conceptually straightforward. As you delve into it you will discover it is laden with complexity. Understanding something about fiduciary responsibility, investments and government compliance requirements is not what you are trained to do.

What most people do not realize is that more often than not providers do only the minimum required and avoid taking on any fiduciary responsibility. Read their service agreement and you will find that it says the Employer is the “responsible party”. Some providers say they will be a co-fiduciary with you, but that still does not alleviate you from liability.

Investment providers that sell inexpensive packaged plans will keep track of your money but are not responsible for plan compliance details required by law. They seldom give advice or take on any liability for the compliance aspects of the plan.

It says right on the government’s tax return for the plan (Form 5500) that the business owner or company officer is signing under penalty of perjury that the information on the return is true and correct. How would you know if the information on the form you are signing is true and correct? With the advent of electronic filing of tax returns, do you review what the provider has given to the government on your behalf? They are required to send you a copy that you sign and retain.

If you have a plan subject to independent audit, it is likely the auditor will find any problems that may have occurred during the year. If you have less than 100 participants, the threshold for an audit, you may not find out there are inconsistencies until the government audits and then it too late the fix the problem without incurring penalties.

Therefore, it makes sense to surround yourself with a retirement plan consultant that specializes in retirement plans to guide you and be one of your trusted advisors. Benefit Equity Inc. (BEI) is a Third-Party Administrator (TPA).

I have found that most of the organizations selling 401(k) rarely go into detail on all the responsibilities you are on the hook for until after you bought their plan. After all, most of the time you are talking to a sales representative. The best providers will spend time with you or your staff going over what they do and what is expected of you. The problem is they are talking in “pensionese” the language of retirement plans. When they are all done talking, it feels either as if you did not get enough information to make an educated decision or you just feel dumb.

Although there are many 401(k)’s operating today, how the plan operates, otherwise referred to as plan administration remains a mystery to small and mid-size employers. Large corporations have benefit departments, but still use outside consultants to keep them out of trouble.

To help demystify a 401(k) plan you need to know that there are six key elements to a 401(k) plan. The government has written approximately 4000 pages of rules and regulations on retirement plans. I will cut this overwhelming amount of information down to a little over 100 pages. The very thought of simplifying this subject will have pension actuaries rolling their eyes and writing to the publisher to remove the book from store shelves.

Obtaining knowledge about these six key areas will help you know if you have a good provider. It will also give the guidelines for managing the ongoing process of sponsoring a 401(k) plan.

The Six Key Elements

There are six elements to a 401(k) Plan.

Fiduciary Responsibility: This standard mandates prudent management and oversight of a qualified retirement plan.
Plan Document: This is a legal document and describes how the plan will operate. The plan design, operational guidelines and government rules are contained in this document, generally known as the “plan and trust document”.
Administration: This is the job of the Third Party Administrator (TPA), also known as a professional plan administrator hired to manage all the rules set forth in the plan document. The insurance company or investment company that you hire may offer this service, too.
Recordkeeping*: The record keeper receives a check from the employer each pay period and invests it according to each participant’s direction. This is a job completed for you by the investment company, trust company or TPA.
Investments: Most plans allow their plan participants to invest their money in mutual funds. Mutual funds are purchased from 401(k) investment providers such as insurance companies, stock brokerages or directly from the mutual fund. The organization you purchase your mutual funds/investments through is usually the recordkeeper, too.
Education: Enrollment brochures provide information about the plan and the investment offerings. Additional information is available online and through on- sight meetings held by the investment company and/or financial advisor.

*All mutual fund investments or trades must be “cleared” or settled. This process is the buying and selling of securities or moving money from one mutual fund to another.

The following is a more detailed explanation of these elements. As you progress through the book, you will receive more insight on the interplay between these elements.

Fiduciary

Any person who exercises discretion or control over the management of the plan or its assets or who is paid to give investment advice regarding plan assets is a fiduciary. The duties a person performs for the plan, rather than his or her title, or office, determines whether that person is a plan fiduciary. Plan fiduciaries generally include the business owners, plan trustees, Registered Investment Advisors (RIA) and members of a plan’s investment committee. Providers such as actuaries, accountants, brokers, professional plan administrators and recordkeepers are not fiduciaries unless they exercise discretion or are responsible for the management of the plan or its assets. (ERISA Section 3(21); DOL Regulation Section 2509.75-8, D-2)

“A fiduciary is a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents.”

This is the highest standard of law relating to responsibility of money and property.

Plan Document

An Employer that sponsors a retirement plan must adopt and maintain a legal plan document. This document is the manual that sets forth how the plan will operate. This plan document must be kept up to date with all the government’s rules and regulations.

You do not have a legal 401(k) or other qualified retirement plan without a plan document.

Administration

The standard for small to medium size employers is to outsource the compliance components of the plan.

The government has a set of rules you must follow to keep your plan qualified. The people schooled in retirement plan rules are called plan consultants, actuaries, third party administrators, attorneys and accountants. These people take great strides to be known in their communities, have impressive credentials and have no qualms about reciting you the rules and insisting you follow them. If you do not follow the rules, the plan can be disqualified and you can be heavily fined. The reason plan providers are strict about following the rules is that they can become liable if they know you are not following the rules.

Compliance entails being sure participants do not exceed contribution limits, do not enter the plan to early or for that matter too late. There are non-discrimination tests called ADP and ACP tests along with coverage tests, participation tests, top heavy testing, cross testing and the list goes on. The relevance of these tests depends upon your plan design. The point I want to make is that without good third-party administrative support your staff must take on more work and be more knowledgeable.

In my book “America's Retirement Plan: An Employer's Guide to Understanding the 401(k) Plan” I suggest you hire a professional plan administrator known as a third party administrator or TPA, as opposed to having one imposed on you by a bundled (handles everything) provider. The government takes compliance very seriously. Their rules are both complex and daunting. You cannot use the excuse “I did not know”, because the rules are all in writing published by the government. Therefore, you should engage a professional to assist you in carrying out the terms of the plan. It does not matter how good your investments are or how engaging the enrollments materials are if you violate the terms of the plan.

Recordkeeping

Every time payroll is run employees participating in the plan are required to have their 401(k)-deferral set to the recordkeeper. Also, when a participant wants to change the way they have invested their money they go online to the record keeper’s web site. The internet is the prescribed way to move your money from one mutual fund to another. You can monitor your investments and get all kinds of education and supporting documentation. The record keeper can be an investment company, a mutual fund group, insurance company, trust company or third-party administrator.

Investments

It is the job of the Trustee, who is usually also the business owner, to hire the investment provider. The investment provider can be any organization licensed to sell investments. The trustee is responsible for the money and makes the decisions on how the money will be invested. Since the business owner is usually the trustee, the business owner is in effect the responsible party.

Most 401(k) plans are designed to conform to the Dept. of Labor Regulation 404(c) and pass the responsibility for investing the money from the trustee to the plan participant. This is called a self-directed plan. However, it is the trustee’s job to decide what investments will be made available for the plan participants. Plan investments should be reviewed quarterly and measured against appropriate benchmarks. On an annual basis a report is generated indicating how the investments performed over one, three and five years. Some providers do this automatically for you. If all they do is provide a list of mutual funds you should hire an investment advisor to help you review the funds.

Education

The standard for small employers is a company meeting conducted by the investment advisor. These meetings explain the plan provisions, why you should save for retirement, and provide information about the investments. See chapters on Investments and Employee Education and what to expect from an employee meeting.

Author
Robert H. Gorelick, APA
CEO
https://www.linkedin.com/company/benefit-equity-inc-/

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