January 7, 2019
What should you look for in a Defined Benefit Plan TPA?
Last week, we talked about how Defined Benefit Plans work. We also described how a Plan could massively reduce your taxes.
Perhaps now you’re ready to take the next step. You want someone to confirm that a Defined Benefit Plan (“DB Plan”) really is a good fit for you. Also, you need someone to set up and do the Defined Benefit Plan administration. Maybe you’re feeling a bit lost…who can help you with these next steps? Fortunately, a Defined Benefit Plan TPA can assist you with all of the above.
What is a TPA and what do they do? What should you look for in a Defined Benefit Plan TPA? We’ll answer these questions in today’s post.
A TPA is a Third Party Administrator. TPAs are organizations that assist with certain aspects of employee benefit plans, such as retirement plans. In this post, we will talk specifically about Defined Benefit Plan administrators. If you have a Defined Benefit Plan, your TPA is a key partner.
Your Defined Benefit Plan administrator will design, set up, and administer your Plan. Eventually, they will help you terminate your Defined Benefit Plan. Since we covered these steps towards the end of last weeks’ post, we won’t describe them here. Rather, let’s focus on what to look for in a Defined Benefit Plan TPA.
First, a word on Cash Balance Plans.
A Cash Balance Plan is a type of Defined Benefit Plan. However, Cash Balance Plans have unique features not found in Traditional Defined Benefit Plans. Thus, not all Defined Benefit Plan administrators are skilled in Cash Balance Plan administration. A Cash Balance Plan TPA should have specific experience with Cash Balance Plan administration.
When you select a Defined Benefit Plan administrator, we believe the most important characteristics are shown below. We’ll discuss each of these items in more detail.
It goes without saying that your Defined Benefit Plan administrator should have deep Defined Benefit Plan administration experience. Defined Benefit Plans are complex and highly regulated under ERISA and the Internal Revenue Code, As a result, you will need to rely on your TPA to comply with these requirements.
How many years has your been involved in Defined Benefit Plan administration? What types of Defined Benefit Plans have they administered? Are they able to easily answer your questions? Are they a credentialed practitioner?
These are straightforward questions, although when it comes to credentials, what should you look for in your Defined Benefit Plan TPA?
In the Defined Benefit Plan TPA world, there are a number of available credentials. As a result, it’s not easy for a business owner to determine what these designations mean and the level of competence demonstrated by the practitioner.
While that may be true, it’s important to note that only the Enrolled Actuary designation is absolutely required for a Defined Benefit Plan. The implications of having one required designation are important. Essentially, government agencies responsible for regulating Defined Benefit Plans recognize that an Enrolled Actuary has demonstrated a level of expertise sufficient to certify Defined Benefit Plan calculations. That’s a vote of confidence not given to any other designation.
What’s more, if your Defined Benefit Plan administrator does not have an Enrolled Actuary on staff, they will be required to outsource the certification of the figures to an Enrolled Actuary. That’s an important fact, because when two organizations are involved, coordination becomes more difficult. Therefore, a Defined Benefit Plan TPA who is an Enrolled Actuary or employs an Enrolled Actuary is ideal.
In addition to strong experience, it’s important that your Defined Benefit Plan TPA communicate to you the technical aspects of your Plan. This ensures you understand both your opportunities and obligations with regards to your Defined Benefit Plan.
Communication includes your TPA’s responsiveness, ability to explain complex concepts understandably, and the habit of keeping you apprised of opportunities and “next steps” (in a timely manner, of course).
A lack of communication is probably the biggest source of frustration we hear from business owners and their providers who want to move their business to us (we consistently hear from our clients that we are adept communicators).
Lastly, it’s important that your Defined Benefit Plan administrator be consultative in their approach.
To be consultative, your Defined Benefit Plan administrator must ask questions to understand your objectives. Initially, this allows your TPA to propose a solid plan design and solicit your feedback, until the optimal plan is implemented. By contrast, “cookie cutter” designs are not consultative.
To be consultative, your Defined Benefit Plan administrator must stay in touch with you to understand your evolving business needs and constraints. Among other considerations, this includes having a pulse on your tax and cash flow situation, which allows for careful planning to meet your objectives.
A consultative approach means your TPA is a business partner not just a vendor. As you can imagine, having this level of relationship is a game changer for you and your business.
Finding a strong TPA to help you evaluate the feasibility of a Defined Benefit Plan design and provide the ongoing service is essential. Hopefully, this post helped you understand what a TPA does and what to look for in a Defined Benefit Plan administrator.
If you already have a Defined Benefit TPA or are a TPA yourself, what do you think makes a good TPA provider?