what makes a tpa great:
what makes a tpa great:
what makes a
tpa great: how technology is
By Ilene Ferenczy
By Ilene Ferenczy
By Ilene Ferenczy
By Ilene Ferenczy
The first few years of the 2020s have been a time of huge legislative and regulatory changes in the retirement plan industry. Several new laws have been enacted, after a nearly 20-year legislative drought. The regulatory bodies—basically, the Internal Revenue Service and the Department of Labor—are overwhelmed by the guidance that they are charged with providing in connection with the statutory changes. And, then, everyone who deals with retirement plans must assimilate the new rules and put it all into practice..
The first few years of the 2020s have been a time of huge legislative and regulatory changes in the retirement plan industry. Several new laws have been enacted, after a nearly 20-year legislative drought. The regulatory bodies—basically, the Internal Revenue Service and the Department of Labor—are overwhelmed by the guidance that they are charged with providing in connection with the statutory changes. And, then, everyone who deals with retirement plans must assimilate the new rules and put it all into practice..
With all the changes happening in the retirement plan industry, it is increasingly difficult for plan sponsors to decide who to select for their professional third-party administrator. Should they enter into a bundled contract with a large recordkeeper? Should they work with one of the large administration firms that have been gobbling up smaller firms, coupled with an institutional recordkeeper? Or should they choose a smaller, independent firm to oversee plan compliance, working with other investment and recordkeeping providers?
With all the changes happening in the retirement plan industry, it is increasingly difficult for plan sponsors to decide who to select for their professional third-party administrator. Should they enter into a bundled contract with a large recordkeeper? Should they work with one of the large administration firms that have been gobbling up smaller firms, coupled with an institutional recordkeeper? Or should they choose a smaller, independent firm to oversee plan compliance, working with other investment and recordkeeping providers?
In truth, the size of the TPA provider does not matter. What does matter is the quality of services provided. While that seems axiomatic—of course, the quality is what counts—it is amazing how often consumers make incorrect assumptions about what are likely indicators of TPA quality. One such assumption is that bigger is better, i.e., a larger TPA firm has more sophistication or abilities than a smaller firm, and that this will result in better plan administration. While large providers have their places, it is incorrect to assume that small TPA firms are incapable of being effective and efficient shepherds of retirement plan administration.
In truth, the size of the TPA provider does not matter. What does matter is the quality of services provided. While that seems axiomatic—of course, the quality is what counts—it is amazing how often consumers make incorrect assumptions about what are likely indicators of TPA quality. One such assumption is that bigger is better, i.e., a larger TPA firm has more sophistication or abilities than a smaller firm, and that this will result in better plan administration. While large providers have their places, it is incorrect to assume that small TPA firms are incapable of being effective and efficient shepherds of retirement plan administration.
The characteristics of what makes a TPA “good” vary from client to client, based upon the client’s wants and needs. Some clients want a lot of hand-holding and personal attention. Others want things to be very procedural, very predictable, without a lot of person-to-person contact. Some clients want a broad range of services, including fiduciary responsibility and participant interaction. Others want just the basics.
The characteristics of what makes a TPA “good” vary from client to client, based upon the client’s wants and needs. Some clients want a lot of hand-holding and personal attention. Others want things to be very procedural, very predictable, without a lot of person-to-person contact. Some clients want a broad range of services, including fiduciary responsibility and participant interaction. Others want just the basics.
One factor has historically weighed heavily in favor of larger firms: technology. Many people assume that only the largest recordkeeping and TPA firms are in a position to provide sufficient technical links and processes to take some of the burden off the plan sponsor. And, at a time where many human resource functions, such as payroll and health benefits, are increasingly managed through online systems, being able to download information directly and then use it in the plan’s administration seems like it would be a huge advantage.
One factor has historically weighed heavily in favor of larger firms: technology. Many people assume that only the largest recordkeeping and TPA firms are in a position to provide sufficient technical links and processes to take some of the burden off the plan sponsor. And, at a time where many human resource functions, such as payroll and health benefits, are increasingly managed through online systems, being able to download information directly and then use it in the plan’s administration seems like it would be a huge advantage.
Let’s first note—before we get into the ability of various types of TPA organizations to take advantage of automation—that it is, in the author’s opinion, not feasible for retirement plan administration to be fully automated. The complications of the law in this area, coupled with the fact that different sponsors and participants have diverse needs and wants, means that there are times where humans must intercede and provide guidance and, at times, research. Just like people generally don’t simply refer to The Wall Street Journal stock listings to make investment decisions but use an investment advisor to help them dissect and understand the information in their own financial context, not every decision to be made about a retirement plan or an individual’s retirement benefit is linear or mathematical in nature. In situations where participant perceptions and plan sponsor considerations are important, HAL may not be able to evaluate whether the pod door should be opened. To push this metaphor a little further: don’t forget that even a technologically-based organization like NASA still has people on the ground to make human judgments when it launches a mission.
Let’s first note—before we get into the ability of various types of TPA organizations to take advantage of automation—that it is, in the author’s opinion, not feasible for retirement plan administration to be fully automated. The complications of the law in this area, coupled with the fact that different sponsors and participants have diverse needs and wants, means that there are times where humans must intercede and provide guidance and, at times, research. Just like people generally don’t simply refer to The Wall Street Journal stock listings to make investment decisions but use an investment advisor to help them dissect and understand the information in their own financial context, not every decision to be made about a retirement plan or an individual’s retirement benefit is linear or mathematical in nature. In situations where participant perceptions and plan sponsor considerations are important, HAL may not be able to evaluate whether the pod door should be opened. To push this metaphor a little further: don’t forget that even a technologically-based organization like NASA still has people on the ground to make human judgments when it launches a mission.
Nonetheless, how can a boutique TPA firm compete with a large organization in its ability to obtain and analyze large amounts of individual participant data, including hire and termination dates, compensation amounts and types, deferral elections and deposits, matching contribution calculations, loan payments, and investment returns?
Nonetheless, how can a boutique TPA firm compete with a large organization in its ability to obtain and analyze large amounts of individual participant data, including hire and termination dates, compensation amounts and types, deferral elections and deposits, matching contribution calculations, loan payments, and investment returns?
In olden days—like, three or four years ago—obtaining and evaluating such data was very time- and labor-intensive. A TPA employee would need to obtain this kind of data, often by simply getting PDF copies of statements from the various human resources and plan investment providers. They would then sort it, save and store it by participant and by plan, and then access it for the necessary calculations and allocations, which often required manually entering the information from the PDF documents into the TPA’s administration system. Besides being time-consuming and labor-intensive, this data entry process had a propensity for human error, which would need to be identified and resolved.
In olden days—like, three or four years ago—obtaining and evaluating such data was very time- and labor-intensive. A TPA employee would need to obtain this kind of data, often by simply getting PDF copies of statements from the various human resources and plan investment providers. They would then sort it, save and store it by participant and by plan, and then access it for the necessary calculations and allocations, which often required manually entering the information from the PDF documents into the TPA’s administration system. Besides being time-consuming and labor-intensive, this data entry process had a propensity for human error, which would need to be identified and resolved.
Clearly, if a big recordkeeper with all that information in its computers could provide the TPA services in-house, all that computer data would be available for access by the TPA, putting the recordkeeper at a huge advantage—at least in terms of data management.
Clearly, if a big recordkeeper with all that information in its computers could provide the TPA services in-house, all that computer data would be available for access by the TPA, putting the recordkeeper at a huge advantage—at least in terms of data management.
Technology changes at the speed of sound... or even light. Nowadays, we are seeing the growth of technology and AI service providers (let’s call them “tech folks”) who are providing the necessary avenues for even smaller TPAs to access data with the same or even more ease and efficiency as their big brothers have been exhibiting for several years. It doesn’t take a lot of imagination to see how this is a game changer for everyone, and has the potential to make the entire plan administration process more efficient for everyone.
Technology changes at the speed of sound... or even light. Nowadays, we are seeing the growth of technology and AI service providers (let’s call them “tech folks”) who are providing the necessary avenues for even smaller TPAs to access data with the same or even more ease and efficiency as their big brothers have been exhibiting for several years. It doesn’t take a lot of imagination to see how this is a game changer for everyone, and has the potential to make the entire plan administration process more efficient for everyone.
Think of the tech folks as being middlemen (or -women) between the entities with the necessary data and the TPA firms. The tech folks’ machines can interface with the computers of all those of the recordkeepers, banks, investment advisory firms, etc., and obtain data that the TPAs need. Then, the tech folks can take all that raw data, and convert it to a format that is absorbable by all the administrative systems (i.e., they “talk TPA”). So, much like a language translator at the UN, the tech providers grab the data, sort and refine it, and then present it in an understandable form to the TPA administrative systems.
Think of the tech folks as being middlemen (or -women) between the entities with the necessary data and the TPA firms. The tech folks’ machines can interface with the computers of all those of the recordkeepers, banks, investment advisory firms, etc., and obtain data that the TPAs need. Then, the tech folks can take all that raw data, and convert it to a format that is absorbable by all the administrative systems (i.e., they “talk TPA”). So, much like a language translator at the UN, the tech providers grab the data, sort and refine it, and then present it in an understandable form to the TPA administrative systems.
Suddenly, something that was all about person-hours and manual processes can be done efficiently and automatically, allowing the humans at the TPA firms to do what they do best: provide their intellectual property to make sure that the plan is designed and maintained appropriately and is complying with the laws, and to answer client questions about what is or is not permitted, talk to the IRS and DOL when they examine plans, and do all the other functions that require subjective evaluations and client interaction.
Suddenly, something that was all about person-hours and manual processes can be done efficiently and automatically, allowing the humans at the TPA firms to do what they do best: provide their intellectual property to make sure that the plan is designed and maintained appropriately and is complying with the laws, and to answer client questions about what is or is not permitted, talk to the IRS and DOL when they examine plans, and do all the other functions that require subjective evaluations and client interaction.
With this evolution, the quality of the TPA services is almost entirely dependent on the knowledge and creativity of the retirement plan specialists—which exist in both larger and smaller firms. And, perhaps, the competition between TPA providers becomes all about how these human services dovetail with and service the needs and wants of the plan sponsors and/or participants, and not about who can enter data faster and better.
With this evolution, the quality of the TPA services is almost entirely dependent on the knowledge and creativity of the retirement plan specialists—which exist in both larger and smaller firms. And, perhaps, the competition between TPA providers becomes all about how these human services dovetail with and service the needs and wants of the plan sponsors and/or participants, and not about who can enter data faster and better.
Does every plan require extensive plan design expertise? No. Does every plan sponsor want the same level of handholding? No. But, if the swamp of data can be drained equally for the various types of TPA providers, plan sponsors may decide who to hire based on the qualifications they need and where best to find them and not based on size alone.
Does every plan require extensive plan design expertise? No. Does every plan sponsor want the same level of handholding? No. But, if the swamp of data can be drained equally for the various types of TPA providers, plan sponsors may decide who to hire based on the qualifications they need and where best to find them and not based on size alone.
Ilene Ferenczy is the Managing Partner of Ferenczy Benefits Law Center and a renowned thought leader on retirement plan legal compliance and design.