All companies that sponsor a defined contribution (DC) plan like 401(k) and 403(b) outsource some of the work to third party service providers like record keepers, TPAs (third party administrators) and financial advisors. Smaller companies tend to outsource more functions which is fine but it can lead to complacency and problems if the providers are not properly monitored and plan documents are not followed. A plan sponsor at the Huntsville TPSU program relates how the disconnect led to fines and lots of pain.
Though the TPA and provider should have realized through census data that temporary workers were being excluded in violation of the plan documents, they did not catch it until a full time worker decided to go part time and the plan sponsor thought they were no longer eligible to participate in the company’s 401(k) plan. The TPA informed them that the now part time employee was still eligible according to plan documents and the plan sponsor realized that the plan had been improperly excluding part time workers. Along with filing a voluntary correction with the DOL, enrolling eligible part time workers, the plan sponsor decided to terminate the relationship with their TPA, record keeper and advisor.
Lessons learned? Many people managing their company’s DC plan inherit the responsibility with very little or no training assuming that the plan is fine as are relationships with their providers. Obviously, reading and understanding plan documents is important but more importantly, working with the right providers and advisor who are proactive especially when a new internal person takes over the plan. Though providers should help plan sponsors to comply with plan documents ultimately, if something is missed, the plan sponsor pays the price.
With fee transparency and price pressure, small plan record keepers take on more clients sometimes without increasing resources and details like improperly excluding part time workers can be missed. Though the use of independent TPAs by smaller plans under an “unbundled” arrangement is the most popular service model and growing, some advisors and plan sponsors prefer the “bundled” model where the record keeper performs the administrative duties leaving “one throat to choke”. Though more plans are hiring experienced and qualified advisors, a majority still use professionals with less than five plans under management. Getting the right service model and providers through periodic RFPs will avoid most of the issues fulfilling the primary duties of a plan sponsor to select qualified providers and make sure that fees are reasonable – the duty to monitor is ongoing as is benchmarking.
