One issue in particular that plan sponsors need to examine is whether or not they should use their payroll provider as their TPA.

There are some definite advantages to using a payroll provider as a TPA. “The major advantage of using a payroll provider for your 401(k) plan is the integration of payroll for deferral uploads and data sharing,” James F. Sampson, managing principal for Cornerstone Retirement Advisors, tells PLANSPONSOR. “It can be a great convenience for the plan sponsor to not have the need for uploading deferrals and census data each week, and can also allow for the plan sponsor or plan adviser to have access to live census data, testing results and participation metrics.”

Chris Augelli, vice president of Product Marketing and Business Development for ADP Retirement Services in Florham Park, New Jersey, adds, “Integrating payroll and recordkeeping data allows us to automatically manage the remittance of employee salary deferrals into the plan, on time, every time. It allows for automated and accurate loan administration, and continuously supplies the comprehensive employee census information needed for compliance testing.”

Augelli tells PLANSPONSOR that ADP’s integration capabilities offer the advantage of synchronizing updates made to either platform, whether it’s an update to ADP payroll records made by the client or an increase in a salary deferral made by an employee via the ADP plan participant portal. The system also analyzes the data streams shared during each payroll cycle, proactively looking for input errors. Overall, he says, such integration enables targeted participant communications to help maximize their savings opportunities.

However, there can also be disadvantages to using a payroll provider as a third-party administrator, especially when the integration of payroll and plan administration capabilities is not as seamless as is needed.

“Sometimes, payroll operations and the 401(k) operations are separate, and one doesn’t know what the other is doing,” says the Warwick, Rhode Island-based Sampson. “Efforts are sometimes duplicated when the sponsor needs to upload data to both payroll and 401(k) systems, when the expectation is that they should feed off each other.” Sampson recalls a scenario with a client where an employee was re-hired and making employee contributions to the plan, yet the 401(k) system labeled the employee as terminated and not eligible for nondiscrimination and top heavy testing purposes. This meant that test results were incorrect, testing had to be redone, and the sponsor had to change the employee’s employment status on both systems to make it work, all because one system did not update the other.

Ary Rosenbaum, an attorney with The Rosenbaum Law Firm in Garden City, New York, which specializes in retirement plan issues, recommends plan sponsors do a thorough search for a TPA, choosing the candidate that best meets their needs and not just going for the easiest choice.

Rosenbaum, who recently wrote a paper about the pros and cons of using a payroll provider as a TPA, tells PLANSPONSOR, “Plan sponsors may think that it’s less work for them to have their payroll provider also act as their third-party administrator, but in truth, payroll services have little to do with retirement plan administration.” His experiences with clients have shown him that not all payroll providers acting as TPAs have the necessary expertise in areas such as top heavy and nondiscrimination testing.

Rosenbaum also cautions that some such TPAS may assume that the plan sponsor knows more about the nuances of the plan than they actually do. He recalls one scenario with a client where the TPA did not properly define the term “key employee,” in terms of the aforementioned testing, for plan sponsors. As a result, the plan failed testing it should have passed.

Third-party administrators need to have an understanding of the finer details of plan administration, Rosenbaum says. This includes being knowledgeable about safe harbor issues, plan design, deferrals and combination plans such as hybrids or cash balance plans. They also need to make sure they are maximizing tax deductions for employer contributions, he says.

Sampson concurs that TPAs need to be on their game about a variety of relevant topics. While some payroll providers have adapted to be able to offer plan design features, such as safe harbor and cross-tested plans, they are simply processing information. “A classic case of garbage-in, garbage-out can be common,” he explains.

A big drawback to some payroll providers, as well as bundled recordkeepers, is that they often do not provide any proactive consulting services after the point of sale, Sampson says. The advantage to using a TPA that is not a payroll provider is the consultative approach they provide. “Many local TPAs will visit with clients annually to review company demographics and objectives to see if the current plan design still meets the objectives of the employer. One other issue with payroll providers is that there is rarely a single point of contact for ongoing service. Many times they call a service desk and never get the same person twice.”

As for best practices that plan sponsors should follow when seeking out a TPA, Rosenbaum recommends looking for one that has experience working with plans of similar size, as well as making sure the fees and expertise are appropriate for their plans. TPAs should also have a good knowledge of plan design, he says, with the appropriate levels of experience and training to back up their claims.

Sampson suggests plan sponsors ask TPA candidates to make recommendations for the different plan designs they could use to align with their goals. They should also ask what could go wrong if testing fails and what the remedies might be. Plan sponsors should also ask how often the TPA will review the current design, as rules and company objectives change.

Augelli recommends plan sponsors require their TPA be able to provide ease of administration, alignment with the plan’s interests, and possess the experience necessary to carry out those interests.

And finally, word of mouth is a tried and true method of finding good service providers, says Rosenbaum. “Don’t be afraid to ask for recommendations,” he says. “Talk to ERISA attorneys, financial advisers or accountants.”