Do you know how to pick a 401k plan administrator? This post will teach you exactly what you need to consider to make your choice. Your Solo 401k comes with additional responsibility compared to other retirement plans (like IRAs and SEP IRAs). One additional responsibility is plan administration. The administrator is responsible for making sure that the plan documents are kept orderly and accurate, adding new language to the plan document as law periodically requires, and filing other documentation with government authorities. It can be a headache to take on yourself, but managing a third-party administrator can be just as burdensome if you choose poorly. The goal after reading this is whether selecting yourself or a third party is the best fit for you.
Arguably, the greatest benefit of self-administration is the savings on fees. Third-party administrators can range from $250 to $2,000 annually in base fees, with extra fees built in for plan set up, restatements, and plan amendments. If you intend to have a Solo 401k for 20+ years you can easily get into the mid-five figures in lifetime fees. Fortunately, there is a lot of support from custodians like Charles Schwab, Fidelity, and Vanguard that you can leverage to manage the burden yourself. These custodians have prototype plans that you can just fill in with your plan information and the custodian will update you periodically on any changes you need to make. You just need to be certain you keep your documents orderly and up-to-date by following your custodian’s instructions.
The biggest responsibility comes once your plan hits $250,000 in value. At that point you are required to file your Form 5500-EZ annually. None of the major custodians complete this filing on your behalf, but some do offer some tips on their websites. You simply register at eFast2 and complete the form electronically annually.
Now, if you are concerned about your ability to keep up with any of the responsibilities of documentation and filings you may want to consider moving that job to a third-party administrator, but that doesn’t absolve you of verifying that they are doing their job correctly.
You may also find yourself comfortable with the paperwork, but you are in need of something more complicated written into your plan documents. For instance, many custodians have dropped loan provisions and Roth (tax-free) accounts from their prototype plan documents; so, you need a third-party administrator to draft those plan documents to include those options.
A third-party administrator, or TPA, will manage all of the documentation and filing. You can add as much complexity to the plan as the TPA will support. You do, however, need to periodically check in on your TPA to make sure that you are being serviced properly. There are two broad types of TPAs you can engage: traditional and online-only.
The traditional TPAs that I’ve worked with tend to be less likely to adopt new technology and could probably operate their business the exact same way today that they could twenty years ago. In my experience, they tend to be very knowledgeable and can handle plan customization with relative ease.
These companies tend to target large 401k plans that service hundreds or maybe even thousands of employees. Needless to say, it can be very easy for your Solo 401k to slip through the cracks at a traditional TPA. I’ve seen a client simply forgotten, presumably because the TPA had more important (aka profitable) clients to support. I’ve also seen clients needing four or five emails/calls before getting a request fulfilled. All the while, these firms tend to be the most expensive because their overhead is higher than an online-only firm and the economies of scale that a large 401k plan can achieve just do not apply to a Solo 401k.
Now, the alternative, online-only TPAs are quicker, less expensive, more responsive, and specifically cater to solopreneurs, however…they have a tendency to get things wrong. Here is just a short list of mistakes I’ve seen online-only TPAs make that I’ve never seen a traditional TPA make:
The purpose of this list isn’t to disparage these TPAs (they rectified every mistake they made that I’ve personally seen). The purpose is to identify that they often make mistakes and that you, as the ultimate responsible party, should be on the look out for. You should review and verify everything that you work on together. If you don’t feel qualified to verify the accuracy of these documents then seek out a financial planner who specializes in helping solopreneurs. Then you have someone in your corner who can back you up.