Are You Better off Using a 401k Third Party Administrator?

When you are deciding how to set up your 401(k), a 401(k) third party administrator (TPA) may be the right option. First, it is important to understand the 401(k) model of retirement savings. This model has a high initial administration cost, but the cost goes down as more individuals join the plan. As a result, 401(k) plans are often most effective for large companies. These companies may consider simply assigning the task of administering a 401(k) to an individual already on payroll. If this is the case, a TPA may have a competitive advantage.

Industry Contacts

TPAs serve multiple different 401(k) plans as full-time, industry jobs. As a result, TPAs have a high number of contacts within the investment industry. They may place a high volume of money with certain mutual funds, for example. This can create cost savings for all involved, including your company. By working with a TPA, you can receive a decrease in investment fees with these funds. Your employees will be able to place their retirement savings in high-end mutual funds at a lower cost than if they were to seek out and purchase parts of these funds on their own.

Opportunity Cost

Opportunity cost is an important factor to consider whenever you are comparing outsourcing a task to any third party outside of your business. By using an in-house representative, such as a human resources employee, to administer your 401(k), you may have to add only a small increase in salary to this person's paycheck. However, when using a TPA, you will be paying a large sum to an external party. It may appear cheaper to go in-house. However, this is rarely true. Since the TPA works exclusively in this field, he or she will be more effective with time spent in administrative tasks. Your in-house individual who is not a 401(k) expert may spend far too much time working on this effort, costing you in other areas. 

Investment Results

Beyond the opportunity cost lost by administering a 401(k) plan in-house, you may actually lose money due to poor 401(k) performance. Even a smart investor is not an expert to the same degree a TPA is an expert. These individuals have insider knowledge from years spent in the industry and other accounts they administer. As a result, 401k plans using TPAs often have higher income. 

Decreased Liability

Finally, a TPA may be a good option for a company looking to lower the liability it takes on when offering a 401(k) plan to employees. When you take on this task, you are taking responsibility for your employees' retirement savings. You can be open to lawsuit if you misuse this power or even simply invest poorly. When your TPA is the one making the decisions, however, it is much easier to clarify who is liable for incidents that may occur in the future. The TPA will have insurance and coverage in the case of a lawsuit, making it unnecessary for you to carry as much insurance for this liability, further lowering your cost. 

blog comments powered by Disqus