401(k) Compliance and Reporting - Is Your TPA Firm Accurate and What Does it Matter?

A recent IRS study found that 401(k) Plans are the most "most non-compliant plan type in the retirement plan universe." Since 401(k) plans have become the most common employer provided retirement plan, "it is important to the future of the private retirement system these plans maintain the highest level of compliance possible."

To this end, the IRS has stepped up their review of 401(k) plans. Most employers enlist the services of a Third Party Administrator (TPA) firm to keep their plans in compliance. Because of this, they believe they are protected in the case of an error because the TPA firm provides the service to them. Is this the case?

The IRS an Department of Labor maintain that the plan sponsor is responsible to ensure compliance. As such, any fines or penalties are assessed on the plan sponsor for any non-compliance of the plan. Also if the plan loses it's tax qualified status it is the tax problem for the plan sponsor and employees and not the TPA Firm.

One would next think that a plan sponsor would be able to make a claim against the TPA Firm in the above situation. Throughout the industry the vast majority of engagement agreements that TPA firms have their clients sign include a provision indicating that the plan sponsor has the responsibility to check the reports provided for accuracy. This essentially serves to limit the responsibility of the TPA firm under the guise of "our contract indicates it is your responsibility to check that."

So now that it is established that it is the plan sponsors responsibility, how can they know if their TPA firm is performing things correctly? The quick answer is check their work. You may wonder why even pay them if you have to redo all the work they did. I would not suggest checking everything they do, but I would suggest taking the three to five most recent plan years and check them to make sure they have been done correctly. If you do no have the knowledge to check all the compliance ramifications of your plan for the past few years, hire an independent consultant. If the consultant comes in and rechecks everything and finds no problems you have bought yourself some piece of mind. If they find a problem they can assist you in fixing the problem and should also be able to help you work with your TPA firm to pay a portion of the fees.

If you determine you cannot trust your TPA any further the consultant should also be able to assist you in finding a new TPA firm.