A typical 401(k) plan may have a TPA, recordkeeper, financial advisor, payroll provider, accountant, investment manager, and ERISA attorney.
That’s a lot of cooks in the kitchen.
The problem isn’t having multiple providers. Each provider can play an important role.
The problem is when the plan sponsor assumes that somebody else is handling something when nobody actually is.
The TPA thinks payroll is handling it. Payroll thinks the recordkeeper is handling it. The recordkeeper thinks it’s the TPA’s responsibility. Meanwhile, the financial advisor assumes everyone else has it covered.
Then a deadline gets missed.
One of the biggest mistakes plan sponsors make is failing to understand exactly what each provider does and, more importantly, what they don’t do.
Service agreements matter. Engagement letters matter. Understanding the division of responsibilities matters.
Just because you hired several competent providers doesn’t mean every responsibility has been assigned to someone.
There can also be overlap. Two providers may believe they’re responsible for the same task, while another important task belongs to nobody.
Ultimately, the plan sponsor remains responsible for overseeing the plan. You can’t simply assemble a group of providers and assume they’ll coordinate everything among themselves.
That’s why I believe every plan sponsor should periodically sit down with their providers and review responsibilities.
Who handles eligibility? Who calculates contributions? Who prepares notices? Who monitors deposits? Who handles distributions and loans? Who is responsible for government filings?
Get the answers before there’s a problem.
Having several cooks in the kitchen can produce a great meal when everyone knows their job.
When they don’t, somebody eventually burns dinner.
With a 401(k) plan, that burned dinner can become a costly compliance problem.