How to Become a Third-Party Administrator (TPA)

William Freedman

Topics: API, Trust Platform, Investment Advisors, Third Party Administrators

Takeaways 

  • TPAs are most closely associated with health insurance, but there’s a sub-category focused on retirement planning – this is what we are mainly referring to in this article 
  • Tasks include preparing employer and employee benefit statements, ensuring non-discrimination compliance, and preparing periodic reports required by regulators and tax agencies 
  • Much of what a TPA does is to define the plan according to different vehicles covered under ERISA 
  • While large companies will likely only consider well-established TPA firms to manage their retirement funds, small- or medium-sized businesses might consider a small firm or even a solo contractor 
  • Small TPA firms add value by understanding obscure retirement plans and expressing their benefits to the self-employed, emerging companies, and middle-market employers. 
  • The most significant difficulty to starting a TPA business is that the skillset for handling administrative tasks don't often overlap with sales skills, and a solo practitioner would need to be good at both 
  • Alliances with financial advisors or CPA firms could help with onboarding clients 
  • Licensure, certification, and insurance requirements differ by state  

Have you been misusing the term? 

When most people hear the term "third-party administrator," they think of … Oh, who are we kidding? It's a term they maybe never heard of before and, if they had, they consider the meaning to be opaque. 

Even so, many people in the financial services industry – who really ought to have this vocabulary down – struggle to define it. They will tend to associate I with the health insurance world, and they wouldn’t be incorrect. But “TPA” has a specialized meaning when it comes to retirement plans. 

 

What a retirement TPA does 

TPAs also manage qualified retirement plans. They are organizations – or sometimes individuals – that handle tasks such as: 

  • preparing employer and employee benefit statements, 
  • ensuring non-discrimination compliance and 
  • preparing periodic reports required by regulators and tax agencies. 

But a big part of what a TPA does is to define the plan. Part of the value a TPA adds is that it knows the advantages, disadvantages, and use cases for each one. 

TPAs provide insights into some of those more obscure vehicles. Solo 401(k) plans, money-purchase plans, and cash-balance plans are off the radar screens of most investment advisers. They can, however, be of tremendous benefit to, respectively, the self-employed, private companies that want to extend the benefits of profit sharing and organizations whose traditional pension funds are in jeopardy. 

One common misconception is that only large, well-capitalized S-corporations can play in the TPA space, but that is far from the truth. Certainly, Cook Martin PaulsonAscensus, and Pinnacle Plan Design are among the white-shoe firms that Fortune 500 enterprises will gravitate toward. That said, no every business is in the Fortune 500. Even a solo act can develop a lucrative book of business among small- and medium-sized businesses. It’s a niche custom-made for independent contractors. Then you have TPAs focused on helping you and me. Accuplan is the perfect example of a TPA serving a variety of retirement solutions for individuals.   

So how does one get started? 

 

The way forward 

The first thing is to understand whom you'd be an independent contractor to. That would be the investment company that handles the plan's money management. 

Next, you need to be sure that you're the kind of individual who can go out and sell services. If you can't get clients, you can't make money no matter how good a pension administrator you are. The skillset required to do the day-to-day work and the skill set to do the sales work rarely exist within the same individual. We’re not saying you’re not the exception – we’re just saying that you would have to be that exception. 

That said, there are some shortcuts. If you partner with a financial advisory or CPA firm, that could open doors for you. You’d either have to work as a subcontractor to that firm or else pay them a fee for whatever business they throw you, but that’s just the cost of doing business. 

However, on the subject of clients, try to avoid onboarding those who will suck hours out of your day that far exceed how much they're paying you. Understand that you might have to take on a couple of tough customers just to put the first few points on the board. But as your reputation grows and your rates go up, don't be shy about showing them the door when you outgrow them.  

Lastly, you might need licensure or certification. Or you might not – this differs by state. It’s best to check with your own state’s department of labor. 

Whether or not it’s required, it’s a good idea to have business insurance – specifically against errors and omissions. 

It’s also advisable – but hardly required – to have some kind of professional credential. The Accredited Pension Administrator designation from the National Institute of Pension Administration is a prime example. It'll take you about a year of coursework and cost you a couple of thousand dollars, but it would distinguish you from all the newbies out there. 

 

At the close 

If you decide to take the plunge, there’s one more thing you need to be aware of: TPA work is all about compliance with the Employee Retirement Income Security Act of 1974. The U.S. Department of Labor – to say nothing of its analog in each state – conducts audits. You could get dinged for excluding eligible employees from participating, including or excluding employees from employer contributions, or using ineligible compensation to determine participants’ deferrals. 

“Plan administrators are entrusted with the responsibility of ensuring the plan complies with ERISA,” writes Samet & Co. CPA Jay Kessler. “Compliance begins with obtaining and understanding the necessary documents that govern the administration of the plan. Documenting and following a set of processes is key to operating in accordance with the plan document and ERISA.” 

So if you can do all that and simultaneously keep up the necessary sales-and-marketing regimen, then have what it takes to pursue a lucrative career as a retirement plan TPA. 

 

William Freedman writes about business, technology, and finance for Global Finance, Macrotrends, AlphaSenseSharestates, and other news outlets. He holds an MBA in international finance from The American University and serves on the board of governors of the New York Financial Writers' Association. 

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