The Value of a Good TPA Redux

I’ll say it a million times and I will say it again: there is something to be said about finding a  good third party administrator (TPA) to handle your plan.

I came across a 401(k) plan recently where there was a change of plan administrators at the very same TPA and the news administrators explained that there were several problems with the plan. The first problem was the fault of the plan sponsors by overfunding the safe harbor matching contributions since the sponsor didn’t cap employees’ salary at $245,000 (for 2011). That’s OK since a TPA may not find this error until they do the end of year compliance.

The other issue was a little more problematic. There were outstanding loans in the Plan, the kind of bad loan variety as the participants who took out the loans didn’t make a principal repayment for 5 years. These loans should have been defaulted about 4 ¾ years ago. The TPA’s contention is that they had asked the plan sponsor about the loans every now and then and never heard back. This isn’t about asking for the DVD you loaned your friend, this is about a transaction that threatens the tax qualification of a retirement plan and one of the TPA’s main jobs is to help administer the plan in a way to maintain its tax qualification. To think this went on for 4 years until a competent administrator started to handle the plan is both amazing and alarming.

Again, the difference between a good and bad TPA isn’t just competence, it’s about pro-active vs. re-active. It’s about asking the right questions and getting the right answers.

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