Think Twice: Using a Payroll Provider as a Third Party Administrator (TPA)

We work with payroll companies, both large and small, throughout the country. These companies help employers manage their payroll with great tools and resources. However, they are not retirement plan experts. So, before employers jump in with a payroll provider for retirement plan administration, it’s important to consider all the facts.  In this post, we’ll take a closer look at why plan sponsors should think twice before using their payroll provider as a third party administrator for their retirement plan.

It’s complicated: The importance of retirement plan expertise

Retirement plans come with numerous benefits to employers and employees. However, they also come with many rules and regulations that employers must follow. Plans must comply with the Internal Revenue Code, ERISA, Department of Labor regulations, and the terms of the plan document. To complicate matters, the government continually updates rules and regulations. The SECURE Act and the CARES Act are the most recent major changes, making huge impacts in the industry.

With ever-changing regulations, it is easy for things to go wrong. In fact, errors easily go undetected in regards to contribution timing, eligibility determination, vesting tracking, preparing Form 5500, employer contribution calculations, and many other areas. Seemingly small and simple errors can add up to costly penalties and fees for employers.

This is why it’s important for employers to have a team of retirement plan experts administering their plan. While payroll companies may be experts at their systems, they aren’t experts at complicated retirement plan laws. EGPS boasts a team of knowledgeable staff that can keep employers’ plans in compliance. Our credentialed retirement plan experts, dedicated tenured employees, and ERISA Compliance team delight plan sponsors with thorough plan management and clear communication.

Customization: Coming right up (with EGPS)

Employers must also make a plethora of decisions regarding their retirement plan design. Do they want to allow loans, hardships, or in-service distributions? Do they want to have a certain vesting schedule to discourage turnover? Or do they wish to use profit sharing as a bonus to increase loyalty among their employees? How much do they want to contribute? Given their employee demographics, do they want to avoid nondiscrimination testing with a safe harbor option? Is a cash balance plan a good fit?

Most payroll providers will not ask these questions. Instead, they typically set employers up with “one size fits all” plan type and routinely process information without analyzing the data they receive. This can lead to issues down the road. At the very least, this results in the lost opportunity to optimize the plan to meet the employer’s goals.

Alternatively, EGPS believes in designing the plan based on what’s best for the employer, not on what is easiest to administer. We listen to employers’ needs and specific goals for their retirement plan, asking the right questions along the way. Then, we present employers with the best options available.  EGPS partners with employers to craft a retirement plan customized to meet their unique goals and objectives.

The bottom line is that payroll providers offer retirement plans as an ancillary service. They manage plans in a “data in, data out” capacity, and don’t have the time to focus on each client’s unique needs or create a resourceful service provider relationship.   

Independence: A GOOD thing

Payroll companies typically act as the recordkeeper for retirement plans as a bundled provider. This means they hold and track plan assets, manage plan documents, perform compliance testing, and often act as the financial advisor, with less oversight.

When retirement plans are not bundled this way, the financial advisor, recordkeeper, and TPA perform their specialties separately for the plan sponsor. These providers working together affords better checks and balances, allowing each provider to monitor the work of the other for the benefit of the mutual client – the plan sponsor. Think of it as a professionally bundled arrangement. This arrangement allows each organization to thrive and focus on their own unique skillsets, which may be lost when the jobs are bundled under one provider.

In addition, if fee benchmarking reveals that a different recordkeeper might be a better fit for an employer, employers can change their recordkeeper while keeping the same TPA on the plan.

Dedicated service: Will they be there for you?

Payroll providers usually have a “1-800” number for clients to call, versus a direct line to someone who can help them with their plan. In fact, the lack of consultative service and retirement plan expertise leads to high turnover of 401(k) clients with these companies. This also disrupts plan management and plan governance.

EGPS introduces one Retirement Plan Consultant dedicated to the plan. One point of contact – one person ready to answer any questions and lead plan sponsors through the administration cycle. Additionally, our Retirement Plan Consultants are credentialed retirement plan experts backed by an arsenal of enrolled actuaries and ERISA compliance officers, so employers know that their plan is in the right hands.

What’s next?

Do you utilize a payroll provider for your retirement plan or know of business owners who do? If so, we can help provide more information on the options employers have beyond these providers. Fill out the form below to learn more about better plan options and costs. We’re ready to help!

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About the author

Regional Vice President, Sales & Consulting

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