Third-party administrator and retirement plans: Choosing the right provider

Written by Kevin Hagen

When you decide to set up a retirement plan for your business, you don't have to go it alone. You can seek help in designing the right plan, preparing the necessary plan document, ensuring regulatory compliance, and managing the fund investments. With the right third-party administrator and retirement plans that are suited to your business needs and budget, you can provide your employees with an important benefit.

What type of third-party administrator do you need for your retirement plan?

Third-party administrators include banks, insurance companies, brokerage firms, and companies that specialize in benefit plan administration. A bundled service that includes all administrative and operating functions as well as investment management will meet the needs of most small-to-mid-sized businesses that offer a limited range of investment alternatives.

Unbundled services involve different providers that specialize in different aspects of retirement plans. You need a consultant to design and create the plan, a trustee, an investment adviser to manage fund investments, a record keeper, and possibly other providers of additional services such as telephone or Web support for employees. You may also decide to perform some of these functions in-house. Unbundled services generally provide more flexibility and are geared toward more custom-designed retirement plans.

Questions to ask a potential provider

A retirement plan involves a fiduciary duty to ensure that the fund is managed exclusively for the benefit of the participants. If the third-party administrator of your retirement plan doesn't assume this responsibility, your company and its officers, as the plan sponsor, will bear the fiduciary liability.

If you opt for a bundled service, you should look for long-term financial stability and a solid record in delivering timely and accurate record keeping, regulatory compliance, and reporting. Required reporting includes annual financial statements and an annual summary report, individual statements for each participant, filing tax form 5500, and the required compliance testing.

You should review the range of investment options offered, and the provider's investment performance over time.

For both bundled and unbundled services, the third-party administrator's professional certification and registration is important. You should check their references, see if they have been involved in any litigation or have been terminated by any other clients, and review their overall financial condition and capitalization. The qualifications of their staff are an important consideration, and you will want to know who specifically will be handling your account.

Any potential conflicts of interest could be a concern. If the third-party administrator of retirement plans is paid through commissions from an investment company, investment decisions may be biased, potentially affecting the return on investment. In evaluating an investment manager you should determine the investment goals, strategies and standards, and the diversification of the portfolio.

Before contracting any third-party administrator for your retirement plan you should get a clear written summary of the services to be provided and the cost. If you’re performing any of the work in-house, it will be especially important to ensure there is proper coordination.

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