Article in Summary:
- Many small business 401k providers are more interested in generating revenues for themselves than maximizing your employee’s retirement savings.
- Independent third-party administrators (TPA) are pension plan specialists that design a better 401(k) plan
- The savings in fees from using a TPA can result in s 28% increase in retirement savings
The vast majority of small business 401(k) providers are broker dealers and insurance companies who provide a “bundled service.” In other words, the design of the plan, the investment selection, and the custodian are all the same company. These “plan salespeople” are often not well versed at designing a 401(k) plan that meets the needs of small business owners.
401(k) design is complex and the typical plan salesperson is more interested in the revenue generated than maximizing the benefits to the owners and plan participants. Independent third-party administrators (TPA) are pension plan specialists. They can design a better 401(k) plan and help the small business owner administer their plan properly.
An example is a small business owned by a husband and wife who have five employees. An age-based profit-sharing component was recommended as a way for the owners to maximize deferrals for them, and at the same time, provide funds for the employees into the 401(k) plan. A competent independent TPA was able to point out that by using a group allocation profit-sharing design they could increase their personal contributions by $10,000 a year.
Most independent TPAs are in a better position to make sure that the business owners stay compliant with all their 401(k) responsibilities in the plan documents. Small business owners are busy running their companies and have little time to keep up on plan administration details. Having an expert in the administration can keep the owner out of hot water with the IRS or Department of Labor.
Another advantage of using an independent TPA (“Third Party Administrator”) is the flexibility that is gained by using an investment advisor who can design investment options with much lower costs than found in products by John Hancock, Principal, ING and other firms. The savings can be over 1% a year, and according to the Department of Labor, such savings can result in a 28% increase retirement savings when excessive fees are not charged over the years.
Many quality TPAs are members of The American Society of Pension Professionals & Actuaries (ASPPA).