What is the difference between a Recordkeeper and a Third Party Administrator (TPA)?
There are many parties involved with the management of a company’s retirement plan. Although we hear certain terms being used, many times we do not understand exactly who does what. A common question I get is “what is the difference between the record-keeper and the third party administrator?”
The main purpose of a record-keeper is to keep track of the money. Record keepers are responsible for maintaining the accounting of plan contributions and what they have earned.
Many retirement plans have different types of contributions such as:
- Salary deferral (pre-tax and/or post-tax) from the employees
- Employer matching
- Employer profit sharing
- Rollover contributions
- Qualified nonelective contributions
All of the contribution types are treated differently mainly due to tax consequences and vesting schedules, so it’s important to account for the different types of contributions independently. Record-keepers track which incoming dollars are which. In addition to tracking individuals’ assets, record-keepers often provide other services, which include:
- Maintaining a web portal to check 401(k) balances and make transfers
- Printing and mailing account statements to employees
- Requesting trades and other transactions within participant accounts
- Producing enrollment and education materials
- Review operations to ensure compliance with various laws
- Update processes as regulations change
Third Party Administrator (TPA)
A TPA is responsible for run many daily aspects of your retirement plan. The TPA you use is very important because they make sure that the plan stays qualified under the IRS, and helps preserve the tax deferral status of the contributions set aside for the retirement of the plan participants. One reason many people don’t understand the role of a TPA is that many 401k providers have bundled TPA services in with their record keeper. Here are some examples of what the TPA does for your plan:
- Amendments and the restating of plan documents
- Assisting with the processing of distributions from the plan
- Preparing loan paperwork for plan participants
- Testing the retirement plan each year to check compliance with all IRS non-discrimination requirements as well as plan and participant contribution limits
- The allocation of employer contributions and forfeitures
- Calculating participant vested percentages
- Preparing annual reports as required by IRS, DOL, and other government entities.
The record-keeper and TPA you choose for your plan is important, but it is also crucial for you to understand the roles of each provider. For many, a bundled option is beneficial since it can reduce the number of contacts and provider oversight for the plan sponsor, but note that even some bundled plans allow you to replace different pieces of the service if you have a specific TPA that you want to use.