401K plans are complex and require that all the various service providers to the plan be “on the same page”. These “qualified” plans, along with 403b and 457 government plans, require excellence as to design, regulatory compliance with the DOL and IRS, recordkeeping/bookkeeping, payroll consistent with the plan documents and laws, and investment advice to the plan sponsor and plan participants. Most employers do not fully understand the multiple dimensions of their plan and the need for coordination among the various plan service providers. As with all things complex and multifaceted, a project manager or “quarterback” needs to be identified who will take on the responsibility of making sure the retirement plan runs smoothly and that effective communication occurs among the various plan service providers.
At the small to medium sized business/organization level, most employers (who are “plan sponsors”) do not have the knowledge to “project manage” their employee retirement plan themselves, and therefore they need to outsource this role to an experienced “plan advisor”—–who generally is the investment advisor, but who in some cases is the “third party administrator”—–in many cases, the investment advisor leans on the legal expertise of the TPA to help them design and administer the employer’s plan. Here is the chronology of the typical setup and “team of service providers” for a qualified retirement plan (401k, 403b, 457):
EMPLOYER WANTS A RETIREMENT PLAN FOR EMPLOYEES, INCLUDING OWNERS
Generally, the employer is advised to consider setting up a retirement plan by financial planner and/or tax advisor/CPA. Most plans in the small to medium sized business category have 2 primary objectives—–provide a plan which can be used for recruiting and retention of quality employees AND also provide a vehicle in which the owners of the employer can contribute substantial funds for their own retirement. PLAN DESIGN is critical at this phase, and a professional plan advisor can help the employer design the plan which best meets the objectives of the employer/organization. Buying a “one size fits all” plan, “out of a box”, is a mistake that many smaller employers make. The financial planner/tax advisor will help design the plan to meet customized objectives, often collaborating with an outside “third party administrator”, or TPA
WHAT DOES THE TPA DO FOR THE EMPLOYER?
An experienced TPA knows both DOL and IRS laws and is able to use design techniques which will be compliant with the laws as well as meet the customized needs of the employer/plan sponsor. After the appropriate retirement plan type and design is crafted, the TPA then becomes the “administrator” of the plan to ensure it is legally compliant (amending the plan as needed based on law changes), handles employee loans and distributions from the plan to participants, performs the required annual non-discrimination testing for the plan, and preparing the required annual Form 5500 plan reporting. It is important that the employer choose a TPA who has experience with all types of plan designs and knows the very complex DOL and IRS laws regarding retirement plans
THE PLAN RECORDKEEPER
Generally the primary 401k plan advisor (often starts with financial planners who have specialized in retirement plans for employers) will help the employer select an institution who will be the “recordkeeper/bookkeeper” for the plan, and who also will provide investment platforms from which the employees select their retirement plan investments. This “recordkeeper” (often referred to as the “plan provider”) also handles the day to day transactions of the retirement plan, which include collecting employee and employer contributions on a regular basis, making sure the employee contributions are invested per the direction of the employees, and essentially maintains records of money flows and “who owns what”. Some of the large plan recordkeepers are John Hancock, Fidelity, Empower and Nationwide.
PAYROLL COMPANY OR PAYROLL IN HOUSE
It is imperative that the employees’ decisions as to when and how much to contribute to their retirement plan be processed correctly through the payroll process, to include whether the employee “elective deferrals” are pre or post (Roth) tax. The payroll company can also assist the employer with routing the plan contributions to the investment “house” (custodian), and with details as to pre or post/Roth tax.
COORDINATING THE PARTIES FOR EXCELLENCE IN PLAN OPERATIONS
Since mistakes can happen at virtually all levels of the plan operations and by all parties involved, it is imperative that the employer selects a QUARTERBACK/PLAN ADVISOR, who should thoroughly understand how qualified plans work and communicates “who does what” among all the parties. Operational mistakes in retirement plans are much easier to fix when caught early, so periodic reviews of the plan operational details are needed by the “quarterback”. A plan “quarterback” is often involved early on when plan design is being discussed and often will be able to refer the employer/plan sponsor to other service providers who are known experts in working with qualified retirement plans
IN CONCLUSION
401k,403b and 457 retirement plans are complex as to both labor and tax laws, as well as to plan design options—-It is vital that the employer selects a “quarterback” who will take ownership in ensuring that the other service providers know their roles in the plan operations and do them correctly. Correcting plan mistakes and oversights can be time-consuming and costly.
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