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Understanding 401(k) Plan Record Keepers

Published by Summit Marketing Team on Apr 12, 2021 11:00:00 AM

The 401(k) Audit CPA Success Show: Episode 16

In this month's episode, Summit's Director of Accounting, Jamie Nau sits down with our Director of Auditing, Kim Moore to discuss record keepers and third party administrators. This episode gives light to one of the most common questions we get from our clients — "What should I consider when I plan to hire/switch service providers?".

We will take a deep dive in to this and discuss all you need to know and consider as a 401(k) plan administrator.




Jamie Nau: Hello everybody, and welcome to today's show. Another great topic here from Kim, who is our Audit Director here at Summit CPA. Today we are going to talk about record keepers and third party administrators. So Kim, welcome to the show. I can't wait to hear more about this topic.

Kim Moore: Thank Jamie, and welcome everyone to our topic today. We wanted to talk about this because there's a question I get from our clients quite a lot. If you are an administrator 401(k) plan, in almost all cases, they use service providers to help with the administration of the plan. We're going to talk today about record keeping or a third party administrator. They go by different titles and there's different levels of service you can get. So you're not going to get all hung up on titles today. But this is the service provider that would provide services primarily related to your participants. So they're the ones that deal with your contributions, you know, going into your plan and referral rates, things like that. They're going to deal with loans distributions. They're also going to do, in most cases, a lot of the compliance activities for your plan. So we wanted to talk about that. The questions that I get are for whatever reason, I don't really like the service provider I have, or maybe they've changed personnel and they don't like the newer person that they've been assigned to. Or maybe it's just getting expensive. Could be a variety of things. Maybe they've made a lot of mistakes. So we get questions quite frequently about if I would want to change my record keeper, what should I look for? You know, what kinds of things should I do as I'm trying to make that decision of either should I change or not? And if I'm going to change, which new provider should I select? So that's kind of what we are going to talk about today.

Jamie Nau: Awesome. Yeah, this sounds exciting. So again, like you said, there's lots of reasons for changes. So let's jump right into it. So what should we look for when we are looking for a new one?

Kim Moore: Well the first thing I wanted to point out, of course, is facts and circumstances. So in each case is going to be slightly different. But the first thing that we recommend that you take a look at is just kind of the background of the service provider, just as you would do with any other provider or vendor that you might work with. You want to make sure that you're working with a reputable company. So you want to be asking them how long have they been in the business, what's their background and experience, how many plans do they work with? What types of plans do they work with? We also recommend references or, you know, maybe they can give you references, or talk to current clients that might be having a similar type of service provided to them that you would be looking for. That way you can find out what the real experience is like. We all know how it is working with salespeople where, you know, they're the best ever, and it may not truly work out that way. So we recommend that you do a little bit of due diligence and look in to their background. What can they provide? what level of experience do they have?

Jamie Nau: Asking for references I think is key, or at least talking to another individual or company that's similar to what you're what you're looking for is working with them on. So when you request references, talk about the type of company you are and the size of your plan so they can reference a company similar to you.

Kim Moore: Yeah, absolutely. I know people sometimes are a little hesitant to do that, but we have to provide references to our clients. So we'll get new customers coming to us, or prospective customers asking, can I talk to a couple of your current audit clients? Wanting to see what their experience working with Summit is like. We are happy to do that. I think most reputable businesses are. So I don't think that's out of line to ask for. Sometimes they will give you canned references that they've prepared. Take those obviously with a grain of salt. But if you can actually talk to an individual, that's your best route if you know, you can get them to agree to doing so.

Jamie Nau: I think having a request for the same industry and size makes them have to filter it down a bit more. I know when people come to us for the VCFO side and they say, we are a digital agency, about three million in revenue, can we talk to another digital agency that's around the three million mark? That gives them a quick glance into how they would work out for you. Asking targeted questions also kind of helps get you away from those canned response situations.


Kim Moore: Right, exactly. It's really important here because you have providers providing different levels of service. So you don't want to be talking to somebody that's maybe getting a lot more service and they're paying a lot more and you're going to be paying less and expect less service. Obviously there you're not comparing apples to apples. So yeah, a very good point. Another thing that we recommend is that you ask them about, and think about this yourself too, do you want an assigned representative to work with your plan? So that would be you know, if I have a question or my employees or my participants have a question, they're going to go to Susie. Susie is my rep. So I might work with Susie. Obviously, Susie is going to know your plan better. They're going to know the quirks of your payroll, the type of business you're in, the type of employees that you have. They are going to understand all of those different complexities for your business compared to somebody else. Now obviously, that costs more if you're going to do that. It can be a good way to go. It provides you a lot of extra information you know, you've got a direct number to call. So there's a lot of benefits of doing it that way, but obviously it's more expensive. So definitely you'd want to think about how important is it to you? Are you willing to pay that little bit extra with an assigned rep? But then you also want to talk to them about how much more money are we talking about? What does it mean to have an assigned rep? I mean, just because you have an assigned rep doesn't mean they're going to be doing all the transactions for your plan necessarily. It might mean that, but it also may not. So if that's something you're interested in, you really need to kind of go in more depth with them about what that level of service entails. Understand at what level of service they are going to provide to you for that additional cost and what you will be paying. Another think to look to look at. Another area that we kind of lump a bunch of things into is communication, training and connection with especially your participants. So some things here to ask them about is what types of materials do they have available to provide to your participants? What booklets do they have? How do they provide communication? Do they do it via email or do they just put a bunch of material on their website that you reference? If participants were to go look on the website, do they have in-person training available? You have to pay for that. Some don't really feel that it is necessary. They've got, you know, really tech savvy workforce that can go and find the stuff themselves. So those are the kinds of things that, you know, we think that you should consider. I mentioned tech savvy. It's also important to find out what options they have available from a technology standpoint. So a lot of us today want to do things on our smartphone. So do they have an app that you can use? You know, will it work if I'm just doing browser based viewing on my cell phone or a tablet? Maybe you are old school and do more paper type transactions, maybe your company likes to do things on paper. You know, if that's the case, then obviously you don't want to go with a provider that's going to be say, we do things via text and, you know, cell phone and tablet. It sounds kind of strange, but we have found that there are different providers with different levels of these services. So if you really want to be paper based and we have some clients that do, you don't want to go with the vendor that's are going to be electronic and vice versa. So, you know, definitely something to check out. You don't want to sign a contract and then find out that it's not going to work because you didn’t dig in enough about how you will communicate with them.

Jamie Nau: I think it is true for this decision, or any decision making in a business but to go into it with what are our top three priorities. Is technology one of our most highest priorities? Or is having a paper trail a little more higher up? Knowing you top three priorities for a provider and asking the questions to get those answering is very important. One plan might be great for another, but not good for a different business.

Kim Moore: Yeah, this is not one size fits all by any means. The other thing along the technology side is their website. So there's going to probably be a couple of different websites, a website for your participants that they're going to go into to either sign up for the plan, change things like deferral rates, investments, name and address. Then there's going to be another website that's different that the plan is going to use. So the plan administrator is going to use it to approve transactions, to submit contributions, to view reports. I would highly recommend that you spend some time asking them to show you demos of both of those websites just to look at what's out there. This goes to the training material we're talking about. Finding out how much information is out there for participants. Finding out how much training material is out there for your staff as a company and for your plan administrator. You know, what if down the line someone on your staff leaves suddenly and you've got to bring someone new in, and now you've got to train them. This would be an opportunity to use resources from your provider, but obviously only if they have them and they're easily accessible and they're really easy documents to read. So that's another thing that I would look for on the website. Also look for just ease of use. How easy is it to navigate around? Does it have the kind of reporting capability that you want if you're used to monitoring your plans? Personally we are all looking for websites that are user friendly and easy to navigate around. This is no different. So you definitely want to check into that on both sides. Make sure you see both sides, because they will be different. They'll either be different websites completely or different levels of access. 

Jamie Nau: How does that work? Do they usually give you a demo where you can kind of have them walk through it for you? Then also give you like a one week trial?

Kim Moore: I will depend on, again, the provider and their size. Obviously the larger size providers, they all should be able to show you their website. I mean, that should be not a problem. But the larger providers, usually they have like a sandbox type website. It won't be the actual website because obviously that would have confidential information on it, but it'll be a mock up one that you could go in and you could play around to actually look at what's in there. You could try entering a new participant to see how that works. You could, as a participant, see if I want to change my address how easy is that to do? The larger providers will have that. The smaller ones probably not. They're probably only going to be able to show you what it looks like. But as we talked about before, if you kind of already made a list of here are the things that are really important to me, you know your participants, you know your own staff that deal with plan, you know what they need. So if you can kind of jot down a here's my most important things I need or what I'm missing then you have a list that you can go over with them and then they can show you that. So that would be another option for the smaller providers. Another thing you want to consider is security, and that deals with access. What are the controls around access? So ID password, you know, how strong are the IDs, how often do the change passwords? What kind of password strength do they require? Knowing all those basics upfront are no different here. If you're a larger provider, I would consider bringing in some personnel into the conversation and have them take a look at the security controls. You know, talk to an IT professional at this provider, because you're going to have some very confidential information going back and forth. The last thing you want to have is a breach that it impacts your company because ultimately you will be responsible. If there's a breach and exposes your company or your employee information, obviously that's going to be a problem for you. So security is very important. Then that brings up another area and that's controls. This provider is going to be doing a lot of transactional work for you. You want to make sure that they have skilled personnel, they have good processes, good systems and good controls in place. You don't want to turn over the processing for your plan to someone and then they start making a lot of errors. Not only is that just a problem in and of itself, it generates a lot of admin time for you to get those corrected. You're going to have to listen to your employees complaining. So, you know, it's just a road you don't want to go down. Now, a couple of things you can do here. They may have some booklets or written material prepared about their controls and how things work. There is something called a SOC report. So if this is a larger provider I would put that on my list just to ask them. If you do, that will clearly lay out the controls they have. Depending on the type of report it might even have an independent accountant opinion about the controls and they would have tested them so that would be your best bet. A lot of smaller CPAs are not going to have that. So you can certainly have a conversation with them. You can ask them to walk through some of these types of transactions. What do I do if I have a new employee? How would I get them signed up? What are you going to do in the case someone wants to take out a loan, how is that going to work? That will give you a sense of what they're going to do, what you're going to have to do and what controls are in place. So you can ask them questions like well, what if my employee tries to do this and you really shouldn't be allowing them to take out a loan. How would you catch that? You know, ask those kinds of leading questions and to see how they respond.

Jamie Nau: I guess in my mind, maybe I'm off base here, but to me when you're dealing with employee information and you're dealing with confidential information, I'm not sure I would want to go to a provider that doesn't have an audit SOC report. I mean, is that something that you would recommend as well or what's your thoughts on that?

Kim Moore: I think it depends on the size of your company and the size of your plan. I mean you may not be able to afford the larger providers that are going to have SOC reports. They are very expensive. If you can't make that expense, and you have a smaller provider you're just going to have to spend the time yourself investigating those controls. So again, you've got a little scale here that you're weighing how much do I want to put my time into it? If you've got people in your company that work with the plan, they really understand it, they know the transactions and they're fine with handling that themselves, great. But if you've got people that have really relied on service providers then you also have to consider how much knowledge do they have, how good of an evaluation they're going be able to do because they may not really understand what controls should be there. So again, it's facts and circumstances. You're going to have to kind of decide that yourself. But definitely, the security issue is a huge one because in today's day and age we see it every day in the news, a situation where somebody is hacked and the data gets out, just imagine having to communicate that to your employees. So it's just a path you don't want to go down. So definitely things to consider. We mentioned regulatory and the last thing I had on my list was next to last is compliance. So more than likely, this provider is going to do a lot of compliance activities for you. So they're going to do things like prepare your 5500. They may even file it for you. They're going to conduct your discrimination testing. They may need to process corrections off of discrimination testing and they're going to help with audit support. If you would need an audit, they'll help you determine do you need an audit? And then if you do, they're going to help get the audit or documentation. There are different disclosures that need to be provided. They're going to prepare those. If those are not correct, then there's a fine to you as the sponsor for, you know, providing inaccurate disclosures. They may distribute the disclosure. So, you know, it just depends again on what level of service they're going to provide. But every one of those things I mentioned, there are penalties if they're not either done correctly or they're not done timely. These folks are also more than likely going to prepare your plan document. So you want to make sure that they're, you know, again goes back to the background and experience because whatever that plan document says is what you have to live with. So you don't want someone that you're going to tell them, here are all the provisions I want. And then they go off. And that's not what they put in the document. They put something else. Well, now you've got to live with provisions either you didn't want or they're not the ones that you wanted. And it could be very expensive. You know, they could put in things that you need to defer on, compensation you didn't want to defer on. So now you've got to make up that difference. So this goes to the heart of what you're hiring them to do. And so it's very important to ask them, what are they going to do, how are they going to do it? What background do they have? How skilled are they at this, and also at avoiding potential misunderstandings. So you thought they were going to distribute all of those disclosures. That's not what they agreed to. So no one's distributing them. And then you get to an audit or a regulatory review and everybody point fingers at everybody else. So again, that's a very important discussion. And we see a lot of mistakes made in this area. So definitely an area you want to follow up on.

Jamie Nau: So do you normally get a signed contract or an agreement that states all the things the provider will do? Is that something you could run by your auditor and say this is what they're showing? Is this is a sufficient?

Kim Moore: Yeah, absolutely. There are usually things called a service agreement. It's usually a separate agreement and there might be multiples. So they might have different agreements for different components. And yeah, absolutely. You can do that. You know, you can ask for copies of those and say, hey, I'd like to see, you know, what those agreements look like if you've got a legal department. Absolutely. You'd want to run all this stuff by them. Or, you know, if you've got an outside attorney, it might be worth asking them to just peruse it because it can be very expensive. If you make mistakes here, fixing it later can be very expensive. So spend a little bit of time and even money up front. It's probably to your benefit.

Jamie Nau: That’s a great tip. Real quick, I know you said you had one more topic. I do want to throw our email address out there. So we're always looking for new topics and guest. So to reach out to Kim our email is: audit@summitcpa.net. We’d love to hear from you.

Kim Moore: Yeah please do reach out. So to wrap this up. It goes without saying you'd want to talk about cost. I mean that's probably at the top of everybody's lists. Obviously you want to consider what they're providing versus what you're going to be charged and is it reasonable and you know, and who's going to pay the cost, are you're going to charge it back to participants or is that something the company's going to pay? So those are areas you'd want to make sure you understand so there isn't a misunderstanding in how they're charging your participants and what you thought you were paying. So not going to spend a lot of time on cost because I think most people can figure that one out.

Jamie Nau: Real quick. It sounds like just from the previous things you said that there is quite a bit of variety there. Price will vary quite a bit based on what you're looking for.

Kim Moore: Absolutely. Usually they will provide you it just like any other service provider would, kind of different levels of service. So here's the kind of the cheaper version, if you will. Obviously, that's going to have fewer services provided and then they'll have, you know, maybe a middle of the road and then a more expensive one or, you know, who knows how many varieties and different providers, because you're probably going to shop around. You're probably going to talk to two or three different providers at least, and they're going to have different variations on this, too. So again, one size does not fit all here. And you may go in thinking, I want, you know, maybe the lower end and they show you something in the middle. You're like, I never even thought I could have that. I think it's worth, even if you love your provider and you have no issues, it doesn't hurt to go shop around and maybe you end up right where you started. But it’s not a bad idea to look around because there could be things your current provider can't provide that somebody else can.

Jamie Nau: Or maybe they can provide that you just haven't asked for it. So maybe you learn something that you can go back to your provider and see if they can provide it for you.

Kim Moore: Yeah, absolutely. Great idea. Last thing I wanted and this is not something people typically do. It's probably not at the top of most lists. But just as you would be leaving one provider and going to another, as you're talking to a potential new provider, you want to find out from them what happens if I do sign with you and I stay with you for a while, and then for whatever reason, I decide I want to go somewhere else. They're now sitting with a lot of your data, could be years’ worth of data. It is current employees, former employees, who knows what kind of data that they would be sitting with and you might leave in the middle of the year. So now I'm going to a different provider. You've got part of the year's data. I got to get that over to the other providers. So if I were to sign with you and then later I make a decision to move away, what does that process look like? What are you going to agree to help me with? Because one of the things that we've seen, we see this fairly regularly, is that for whatever reason, one of our client switches from a provider to another provider. They don't think about the timing of that. They don't think about the compliance issues with that, and they don't think about that transition at all. They think you go it just like you switch payroll providers. So we find people think, as long as I get through that last payroll with that company and I'm starting up my next payroll over with Company B, that's all I really need to worry about. That's a huge mistake because at the end of the year, just think of your payroll. You've got to produce tax reporting, you've got to support regulatory requests. You know, I'm going to come in as the auditor and say I need to start over a report. Oh well, we switch providers. I don't have that anymore. So it is very important that as you're talking to a new provider, you think two steps ahead. What happens if I say later on, for whatever reason, I switch to another provider? How is that going to work and how much support are they going to provide? What we typically see is once you tell your current provider hey, I made a decision, I'm going to move over here, they kind of wash their hands of you because a lot of the payments stop. So you're not paying them anymore. So it's very difficult to get them to support that transition. That not always the case, but it does happen quite often. 

Jamie Nau: This is a great topic. Very informative as always. Any final thoughts?

Kim Moore: Just before you get started on these conversations, make a list. Look at what you have, look at what you don't have, what you like, and then just kind of start from there. Cost is important, but it shouldn't be the most important decider. This plan is very important. It's important to employees, to the participants. It is highly regulated. So it is very important to get it right, so take some time to really invest in searching for the right provider.

Jamie Nau: All right, great topic, Kim, we'll talk again soon. 



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