A number of the largest payroll providers are now offering 401(k) third-party administrator (TPA) services. It seems to be logical since 401(k) contributions come out of payroll and they work with a lot of the same numbers. But is it really?
The truth is, that is just about the only thing that payroll and 401(k) administration have in common. They share payroll and some numbers in common, but that’s about it. Would you expect your doctor to style your hair? Doctors are specialists in the body and hair is a part of the body, so it seems logical. But we all know that these are two totally different things. We wouldn’t want our doctor cutting our hair any more than we would want our hairstylist prescribing medications.
401(k) Administration Requires Specialized Knowledge
Unlike payroll, 401(k) plans are governed by highly technical rules spelled out by the Internal Revenue Code and Employee Retirement Income Security Act (ERISA), the federal law pertaining to qualified retirement plans. They have strict annual testing and reporting requirements. You have to really know what you’re doing to get it right, which is why most plan sponsors hire a TPA in the first place.
If your clients want to make sure their retirement plans are run in compliance with the law, they should work with a TPA that is dedicated to 401(k) plans, not a payroll provider doing it on the side. Administering a qualified retirement plan is too complicated and important to do as a side job.
Payroll Providers Do Not Act As Fiduciaries
Another good reason for your clients to hire a TPA is to share some of their fiduciary liability. There is a lot of risk involved in choosing investments and advising participants. A dedicated TPA acts as a fiduciary and is legally responsible for their actions and advice regarding the plan. They are required to put the client’s best interest first.
Payroll providers, on the other hand, do not take on a fiduciary role when they work with a plan. While they will provide a line-up of investments and may make suggestions, they don’t have the same fiduciary responsibility that plan sponsors and investment advisors have. Therefore, if the investments are too expensive or performing poorly, it is the plan sponsor that is culpable, not the payroll provider.
Payroll Providers Offer Limited Service
Usually, when a plan sponsor works with a 401(k) TPA, they have a dedicated service representative. Payroll providers tend to take a team approach and have multiple people working on each plan. This can become an issue when your client calls their payroll provider and can’t find anyone to talk to that has actually worked on their plan. With a traditional TPA, the client always knows exactly who to contact, and that person understands their plan intimately.
A big part of 401(k) plan administration is the annual discrimination testing. In order to perform the testing, a lot of data has to be gathered. Traditional TPAs not only send a plan sponsor the data request, but they walk them through the process and all of the confusing terminology to ensure accurate data. Payroll providers request the data and leave it up to the plan sponsor to figure out the request themselves. Then they use whatever is given to them, whether or not the plan sponsor understands what they are asking for. This leads to inaccurate data and therefore incorrect testing results.
Payroll Providers Offer Limited Options
Payroll providers also only offer limited plan options. There are a number of different types of retirement plans that can be combined in a sophisticated way to maximize retirement savings for a business owner and his or her employees. Payroll providers don’t do this. They will offer your clients simple 401(k) plans without looking at the benefits of a floor-offset arrangement, safe harbor, or new comparability plan. There is nothing custom or personalized with a payroll provider plan.
If your client has a more sophisticated plan and tries to move it to a payroll provider, they might make them start over with an entirely new plan. Most payroll providers don’t handle combination defined benefit or cash balance plans, so these options would have to be abandoned to work with a payroll provider.
How I Can Help
Your clients need help with their 401(k) that they can’t get from their payroll provider. They need to work with a retirement plan specialist, a real TPA. The convenience of a one-stop shop simply isn’t worth the headache of reporting violations, testing mistakes, and being left to figure things out on their own.
If your clients want to work with an experienced retirement plan specialist who can craft and administer custom plans to maximize their retirement benefits, email me today at info@ff401k.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.