Saying goodbye is never easy, but there are certain times when you simply need to do it. When it comes to firing a third-party administrator (TPA), there are a number of reasons they should get the axe. Here are a few.
Unreasonable (and unjustifiable) fees
As a plan sponsor, you’re also a fiduciary. As such, you have the highest duty of care in law and equity.
One of your fiduciary duties is to pay reasonable expenses to plan providers for the services they provide.
It means you don’t necessarily pick the cheapest provider, you just make sure the fees are reasonable for the services provided.
It also means you can always pay more if the services warrant; white glove prices for white glove treatment.
But how do you know if they’re reasonable if you don’t shop around?
In order to fulfill your fiduciary duty as a plan sponsor in a prudent manner, you need to benchmark plan fees.
Whether it’s actually shopping the plan to other TPAs or using a benchmarking service, ensure fees charged are reasonable for services provided. If you determine they’re unreasonable, negotiate with the TPA to lower it to a level consistent with marketplace rates for a similar level of service.
And if the TPA is unwilling to negotiate, it’s time to send them on their way. If you don’t, you’re violating your fiduciary duty, the repercussions of which are costly.
According to fee disclosure regulations, you run the risk that your contractual relationship with the TPA will fall under a prohibited transaction.
A prohibited transaction means excise taxes, and could subject you to possible litigation by the government and/or aggrieved plan participant. No TPA is worth the headache, especially if they’re overcharging.
Too many errors
Third-party administration is hard work. I know that because, for nine years, I served as a TPA attorney. I also represent many TPA clients. As a 401k plan sponsor, you need a TPA to handle the day-to-day administration of your plan. You simply don’t have the time or the knowledge to handle it yourself.
But it means you’re at the mercy of the TPA’s competence. You’re dependent on your TPA for processing of transactions, allocating contributions to participants, completing compliance testing, and preparing Form 5500.
If they don’t their job, it’s your problem. If they fail to properly perform compliance testing and it’s caught in a government audit, it’s on you to fix it. It involves corrective contributions which come out of your wallet. You’re on the hook for liability whether it’s your fault or not because you’re a plan fiduciary and your TPA isn’t.
Sure, you can sue for negligence, but the IRS, DOL, and a plan participant’s ERISA litigator don’t care. So as a sponsor, you can’t afford to too many TPA errors.
TPA turnover
I once worked for an employer with so much employee turnover we joked it should have a revolving door.
Turnover at any company is usually a reasonable part of the business, but not too much. The TPAs level of service should be both consistent and competent. Concern should arise when your contact or multiple contacts frequently change—it’s obviously a sign of larger issues.
Reactive, not proactive
A potential client had a 401k plan with disastrous testing results, and all highly-compensated employees had to receive a refund on their salary deferrals.
The owner of the company received a taxable refund of $10,500 of her salary deferrals. The plan was administered by another TPA in the payroll business but didn’t have a great reputation as an administrator.
While the plan consistently failed discrimination testing, the payroll-provider/TPA never bothered to consider a safe harbor contribution.
More importantly, it never bothered to highlight their testing results—results that indicated the 401k plan could fix the failure with a $7,500 corrective contribution. So, to save the owner’s $10,500 contribution, a $7,500 qualified non-elective contribution could have to be made, but it was never raised the issue.
Good TPAs are pro-active, bad TPAs are reactive. A good TPA would have told this 401(k) plan sponsor that a safe harbor contribution is probably the best method going forward to fix failed discrimination testing; a bad TPA won’t.
Poor communication
I once had a TPA administrator attempt to explain how he reconciled a daily 401k plan on a quarterly basis. It might be possible, but it’s problematic.
The same can be said of TPA communication on a daily-valued 401k plan; some think they can get away by communicating once a year. Your TPA needs to be in constant contact with you. It could be to inform you of upcoming deadlines or to fulfill notice requirements.
You’re paying a TPA thousands of dollars in administrative fees, so there is nothing wrong to expect regular contact. A daily 401k has many moving parts, all connected to your fiduciary duty, so communication is key. If you don’t hear from them frequently, it’s time for a change.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a fun and informative retirement plan conference at Tropicana Field, St. Petersburg, Florida, Friday, Thursday, March 7, 2019, 9:00 am – 2:00 pm.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.