What is a third-party administrator (TPA) for 401(k)?

8 MIN READEditorial Policy

Considering a 401(k) retirement plan for your employees? You’ll need to ensure your plan has a Third-Party Administrator (TPA). The TPA works to ensure your company’s qualified retirement plan complies with all legal requirements, including document preparation, benefit statement generation, and preparing annual nondiscrimination testing, which is required by the IRS. 

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What is a third-party administrator for a 401(k)?

A TPA is a company that specializes in qualified plan administration. TPA services can be bundled with your 401(k) recordkeeper or payroll company, or hired in a strictly third-party capacity (for preparation of annual IRS testing and Form 5500 only). Regardless of how you obtain your TPA, their main job is to ensure your 401(k) follows the regulations contained in the Employee Retirement Income Security Act of 1974 (widely known as ERISA).

What are some common 401(k) third-party administrator duties?

401(k) third-party administrators can perform a number of administrative tasks related to the daily running of your 401(k), including:

  • Preparing and amending plan documents

  • Preparing quarterly employee statements

  • Assisting with plan questions

  • Completing annual nondiscrimination testing

  • Producing distribution and loan paperwork as requested by 401(k) participants

  • Preparing annual filings as required by the IRS, DOL, and other agencies

TPAs are responsible for operating your plan in compliance with ERISA and other complex regulations—so it’s important for you to have one that you can trust. The TPA should be in contact with you regularly to provide updates on how the plan is running, upcoming deadlines, and any new plan legislation.

How to hire the right TPA for your business

The provisions of your 401(k)—as well as your participants’ goals—should be the main things you have in mind when you’re looking for a TPA. Questions to consider include:

  • What services does the TPA offer? Do they have all of the services that I require?

  • Does this TPA have experience handling the type of plan I am sponsoring?

  • Do the TPA’s employees have, or are they working towards, qualifications in the retirement arena from ASPPA or another ERISA industry group?

  • How does the TPA bill? Do I have to pay per hour, or per person, or both? Will I pay transactional fees for distributions and amendments? What services are, or are not included, in my bill?

  • Does my plan cover more or less than 100 participants? (Read What to Know About Plan Audits, which typically are required for plans with 100 participants.)

The answers to these questions will help you determine the type of TPA that would be best suited to you. For instance, if you’re self-employed and adopt a Solo 401(k), you could consider hiring a payroll company to provide TPA services. This is because the plan should be relatively easy to administer.

However, small businesses (those with less than 100 participants) may want to hire an administrator with extensive small plan experience. TPAs that specialize in small business 401(k) plans can easily assist you with complications that may arise in day-to-day administration. Small businesses don’t always have a dedicated HR department, and TPAs that deal with small businesses can anticipate the need for high-touch guidance. 

Another important factor you should consider is the need for your TPA to be reliable and rarely commit errors. They will be working in a complex area of rules and regulations that you may not be educated on. Therefore, you’ll want to find a TPA that delivers a consistently high standard of service and who you can easily contact when you have a question or concern. In addition, your TPA should be honest about mistakes when they do occur, and be willing to remediate the error quickly and correctly.

Setting up your 401(k)

A good TPA can play an important role in establishing your 401(k). Many of the legal steps that might seem complicated at first can be made a lot easier, thanks to their expertise. During the set-up process, the TPA will work with you, your financial advisor, and your recordkeeper to arrange the installation of the plan and support you in customizing the plan to meet your needs. They may also take responsibility for drafting the plan documents, required by the IRS. Some TPAs will also communicate directly with your employees to ensure that they’re successfully enrolled in your 401(k).

Deciding whether you have an effective TPA

In addition to good communication, you can take note of other factors to determine if your TPA is doing a good job.

First, review if your TPA is charges appropriate fees for the services they provide. You can do this by comparing them to market competitors. Ensuring your plan only pays reasonable fees is your fiduciary duty as the plan sponsor—and benchmarking the fees paid by your plan demonstrates you're using a reasonable process to meet this duty. If you determine the fees your plan pays to your TPA are not reasonable, you'll have to try to negotiate more favorable terms or seek a new TPA. You may wish to put out a request for proposal (RFP) to several TPAs in anticipation of switching providers. 

Second, your TPA should also grow with your plan, and meet with you at least annually to discuss nondiscrimination testing results and how your plan can change to ensure future passing results, as well as better benefit your participants.

TPAs vs. financial advisors

Even if your 401(k) has a TPA in place, you could also benefit from engaging a financial advisor. Financial advisors can: 

  • Serve as a 3(38) fiduciary investment manager, where the advisor monitors, selects, and replaces investments for the plan without sponsor approval, reducing the sponsor’s fiduciary risk for investment selection; or

  • Act as a 3(21) co-fiduciary investment advisor, where the advisor provides investment advice to a plan sponsor but the sponsor retains the power to determine which investments are available in the plan. 

Financial advisors can also perform important support services that TPAs cannot. For instance, some financial advisors may hold financial education sessions with individual 401(k) members to help them manage their 401(k) investments. They can also send out informational bulletins about the 401(k) and its investments.

TPAs vs. recordkeepers

While TPAs are responsible for the regulatory and administrative aspects of your 401(k), the recordkeeper maintains records of the assets, investments, and contribution sources in your plan, usually by tracking an “account” for each participant. The recordkeeper will:

  • Allocate assets to participant accounts.

  • Buy and sell investments.

  • Update account balances and share prices.

  • Manage all trades associated with the 401(k), including contributions and distributions.

  • Issue benefit statements on a regular basis.

If you’re still on the fence about hiring a TPA, why not look into Human Interest? Human Interest helps small and medium-sized businesses offer low-cost, high-quality retirement plans to their employees. We provide bundled recordkeeping, TPA, and financial advisory services.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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