What Does a Third Party Administrator Do for Retirement Plans?

A third party administrator (TPA) is an individual or organization that sets up, manages or otherwise administers your retirement plans. In nearly every scenario, you will at least need to hire a TPA to set up your account. Beyond this, you can choose the degree to which you want your TPA to be involved.

Function

• The primary role of a TPA is to set up your retirement account and assure it meets IRS regulations. The main benefit of a retirement account over a savings account is tax incentives. With a retirement account, you can grow your savings tax-free for a time. Depending on your account structure, you may also receive deductions this year or in the future. Your TPA is the one who assures your plan meets the IRS rules to get these deductions. If you do not hire a TPA, you will be in charge of assuring you do not violate the rules.

Types

• There are several types of TPAs and levels of involvement from each. For example, you might set up a retirement account at a bank and hire a TPA outside the bank to administer the account. Alternatively, you may place a retirement account with a company specializing in retirement planning. Here, you are more likely to have a plan administrator in-house. You are also limited to the company's specific retirement account options. When you opt for your own retirement account and an independent TPA, you will have more flexibility in your account structure.

Benefits

• If you manage an account yourself, you are in charge of meeting IRS regulation, serving as your own investment adviser, and reporting your contributions and earnings to the IRS annually. This can be burdensome and difficult, particularly if you do not have an accounting background. Appointing a TPA takes the pressure off you to handle all of this information. You simply fill out a few forms, and the TPA takes care of the rest. At the end of the year, you will receive a form for your tax returns. Throughout the year, you will receive reports on the performance of your accounts. TPAs will also tell you of any changes in IRS legislation affecting your account.

Drawbacks

• Appointing a TPA will cost you a small fee. Typically, the fee is a percentage of the total funds under management. At times, a TPA may operate on an annual fee or earn commissions on your earnings. Beyond cost, using a TPA will also limit your control of an account. For example, if you would like to change your investment strategy, you will have to go through a long process to request the change. You may even need to order the change in writing and wait several weeks for it to go through.

Warning

• If you decide to go with a TPA, the question becomes which TPA is right for your needs. Cost will always be a consideration, but you should also ask a potential TPA about his experience level. Choose a TPA with specific experience working with individuals around your age and income level who have similar goals to your own. You may also choose a TPA based on the company where she works, selecting a company offering options in line with your goals.