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Financial professionals and TPAs are the perfect symbiotic relationship. Financial advisors need trusted partners to create the right legal frame work for their clients’ plans. TPAs are those trusted partners. 

Financial advisors trust TPAs to: create the plan design most appropriate for their client’s needs, to ensure that the plan sponsor understands how the plan is to operate, and relies on the TPA to pass on bad news about prior operational failures. 

The skill set and training to be a successful financial professional does not cover the same subject matter that a successful TPA does. 

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Financial Professional vs TPA

Almost all of the approximately 218,0000 financial professionals in the United States do not have the same expertise and experience understanding the Employee Retirement Income Security Act (ERISA) and how it relates to their clients’ needs that a competent, independent Third Party Administrator (TPA) does. The expertise of financial professionals who focus on retirement plans covered by ERISA covers 2 primary areas: 1) Helping their client make sure the correct investment options are in the plan, and 2) The participants in the plan have the right education and encouragement to pick the right deferral amount for themselves and to pick the right investment options. It’s the TPA’s responsibility to understand how the plan sponsor’s needs and demographics are effected by the controlled group rules, the minimum coverage requirements, the non-discrimination rules, and all the other code sections the IRS has. 

More on: Why financial professionals need TPA’s

How A TPA Can Help: Real World Example

Our firm recently helped a long term, dedicated financial professional who focuses on retirement plans put together the right design for his new client. The client owns 2 separate companies in 2 different industries and has a partial interest in a 3rd company. The client wanted to provide substantial benefits from the first company, but not the second. He was also hoping to provide benefits to the 3rd when it has employees. The advisor understand that if 1 person owns 2 companies 100%, that it’s a controlled group. But he didn’t think we’d be able to exclude the employees in the 2nd company because they want almost immediate entry for employees in company 1. What the financial professional didn’t understand was how the code section 401(b) rules work. The second company had exceedingly high turn over and almost all of them work less than 1,000 hours before they move on to other employers.

Because over 95% of the employees in company 1 were long term, full time non highly compensated employees, and less than 2% of the employees at company 2 work over 1,000 hours per year – the 410(b) ratio percentage test is passed. We don’t have to cover 100% of all the employees we need to include in the test, we only have to cover more than 70% of them.

The final hurdle was what to do with the 3rd company since there wasn’t enough ownership for it to be a controlled group.

Since there was common ownership between the companies, and company 1 was going to receive revenue from managing company 3 – our current read on the situation is that it’s an Affiliated Service Group (ASG). Which means we get to include them in with company 1 in the plan. But even if it wasn’t an ASG, we’d be able to put them in the same plan as a Multiple Employer Plan. What’s that, you ask? Well, different blog for a different day.