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Why it’s not a good idea to have your payroll provider be your 401-k TPA.

As a 401(k) advisor, it’s not uncommon to speak with plan sponsors who have used (or are considering) their payroll provider as their TPA. I don’t think that’s a good idea, and here’s one major reason why.

Retirement plans have a number of responsible fiduciaries, who must all act in the best interests of the plan’s participants. Fiduciaries cannot have any conflicts of interest, and should take care to avoid even the appearance of a conflict.

Suppose I am a plan sponsor who hires a payroll company to be responsible to process my payroll, and they offer to throw in TPA services, often for “free” or a substantially reduced fee.  Why would I consider this—because they have all my data already? While it may sound like the payroll company is helping me to streamline my tasks as a plan sponsor, instead I have a real conflict of interest on my hands. Think about it this way: how does it get resolved if I am not happy with their services as a payroll processor? Can I fire them for that service, and still get the TPA service for free? If not, then there was clearly a quid pro quo in place, and that, very simply, represents a conflict.

Whenever services are “bundled,” it represents the potential for a conflict and should be avoided. Want to know more? This recent article illustrates other significant points for plan sponsors to be familiar with.

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