Blue Ridge ESOP Associates Industry News

ESOP & 401(k) Coordination Tips Post-Disclosure-Part 2

Posted by Tom Roback, Jr.

Jul 31, 2014 9:08:00 AM

Read the first section of this article here regarding ESOP & 401(k) Coordination Tips Post-Disclosure.

ESOP and 401(k) Coordination Tips

ESOP companies should look for providers that have a consultative and holistic approach in this new world Puzzlesof disclosure. When you provide more than one qualified plan to your employees, plan administration should be done in harmony.  The delivery of compliance services should be seamless.  The process should involve one validated census for compliance testing, including the tests that apply to your separate plans and those that apply to your retirement plans on a combined basis. If tests fail, your provider should explain why and look for ways to improve test results.  A good provider will not just deliver reports, but also explain them and offer objective recommendations.  It also could be useful to authorize your TPA to share these recommendations with your financial advisor and/or accountant.

It also might be useful to work with a provider that can work off of several different daily recordkeeping platforms, including those that offer open architecture and access to thousands of mutual funds and hundreds of fund families. Your TPA should coordinate the delivery of all services and ensure that participant vesting and other records are kept up to date and ensure that all loans and distributions are processed properly.  The flexibility in working with many recordkeeping platforms lets them offer the right solution for the customer with no proprietary fund constraints for participants. Your TPA should be independent, have no asset-based charges and all fees should be fully disclosed.

A dedicated team of ESOP and 401(k) specialists provides a coordinated approach to the delivery of services for both plans:

  • Plan sponsor sends census, ownership and officer data, etc. to one service team
  • Service team coordinates census scrub, contribution calculations, determination of deduction limits and delivery of reports for plan sponsor
  • Service team provides coordinated determination of highly compensated and key employees and summary of nondiscrimination testing
  •  Combined plan testing (top heavy and annual additions) is completed through a coordinated effort; excess annual additions corrections are completed through a coordinated effort, eliminating the need for the plan sponsor to serve as intermediary in providing 401(k) data to the ESOP administrator for combined testing
  • TPA provides the plan sponsor with a dedicated single point of contact for all 401(k) plan record keeping, administration and other questions, eliminating the runaround that comes from dealing with multiple vendors or different service personnel. Unfortunately, some daily recordkeepers give plan sponsors the runaround, with telephone transfers from the “relationship manager” to the “ distribution unit” to the “compliance unit, and beyond. You do not want to get lost in the shuffle.
  • Plan auditors deal with one service team with respect to audit requests

Your service team should deliver a proactive and consultative approach to plan administration and compliance services, with a focus on timeliness and technological innovation. Your professionals should have significant breadth of experience in providing ESOP and 401(k) administration and compliance services. Your TPA working with their 401(k) alliance partners, can provide an arrangement in which the daily record keeper handles what it does best – processing transactions, updating accounts daily, providing web access, participant 401(k) call centers – while testing and compliance services are handled by a TPA service team that specializes in those services. Daily recordkeepers are best at daily transaction processing; they will bundle in testing and compliance services as an accommodation. Often, the people in their compliance unit who are running the nondiscrimination tests do not know the client or their business and may not be readily available to explain test results such as a failed ADP test and may not be available to discuss possible courses of action to ensure that future tests pass – i.e., automatic enrollment, safe harbor formulas, etc. In addition, the compliance unit may not have a census scrubber routine and the compliance testing unit’s software and systems may be disassociated from the daily record keeping system. Furthermore, certain daily recordkeepers put the burden on the employer to identify “highly compensated” employees for testing purposes rather than using pension software that assists in the identification of HCEs.


Of the plan sponsors who have taken the time to benchmark fees and service depth, most seem to just be going through the motions. Many have no intention of making a switch. However, benchmarking activity has picked up and when done well it is very useful to plan sponsors. It is important to get complete data and transparency. Reputable providers offer a thorough analysis including, advisor fees, recordkeeper cost, TPA cost, money manager cost, participation, cost per participant and in basis points. Variables include: asset size, number of participants, plan complexity, participant demographics, and plan design. Results should include the mean, median and mode. Generally, analyzing the average weighted cost based on the actual allocation of fund choices is more useful than just looking at the average expense ratio.

Let’s keep in mind there is no requirement that a plan sponsor select the lowest cost provider, but there is no question they need to understand what services they receive and the reasonableness of costs involved. While RFPs are time-consuming for providers, if you don’t benchmark yourself, a competitor will.

Topics: ESOP & 401(k) Plans

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