Pension administration in the United States

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Pension administration in the United States is the act of performing various types of yearly service on an organizational retirement plan, such as a 401(k), profit sharing plan, defined benefit plan, or cash balance plan. Increasingly these plan types are also being implemented in combination arrangements for greater contribution potential, such as the pairing of a cash balance plan with some variety of 401(k). The basic purpose of Pension Administration is to ensure that an organizational retirement plan does not discriminate against the lower level employees while also ensuring that the plan is not used as an abusive tax shelter. Stress tests include the average benefits test, Average Deferral Percentage, and minimum coverage. Yearly pension administration work involves filing a Form 5500 with the Internal Revenue Service.[1] There are several professional designations available to those who perform this work, such as those offered by the National Institute of Pension Administrators [2] and the American Society of Pension Professionals and Actuaries.[3] Pension Administration firms more often than not rely on financial brokers (or financial advisors) for their business prospects, although they do have other referral sources. Some pension administration firms carry out the financial advisory work within an internal unit of their own company, as well as accepting referrals from an independent broker network. Examples of firms with which these brokers are associated are Raymond James,[4] Edward Jones Investments and Morgan Stanley. The brokers may be employees of these firms or independent contractors. The plan assets of the organizational retirement plans in question sometimes reside on a trading platform controlled by the administration firm. But more often than not the assets are held by large financial institutions who provide a variety of investment options for plan participants. Examples of large firms in this market space are Principal Financial Group, John Hancock Insurance,[5] ING Group and Mass Mutual, although there are many others. Plans which contain over one-hundred participants must perform an independent audit each year, necessitating yearly coordination with representatives of a public accounting firm.[6][7] In cases where a defined benefit plan is being managed the pension administration firm must employ an actuary to certify the plan's present and future benefit liabilities and compliance with minimum funding standards set by the IRS. Pension administration firms with a large block of defined benefit plans often employ an actuary directly. But they may also retain the actuary as an independent contractor, and this is almost certain to be the arrangement in cases where the pension administration firm only works on a small collection of defined benefit plans. The actuary completes contribution calculations for the plan and provides a Schedule SB so that the yearly Form 5500 may be completed.[8] Without this Schedule the yearly filing for a defined benefit plan would be incomplete. In addition to the Internal Revenue Service, organizational retirement plan operation and maintenance falls under the regulation of the United States Department of Labor.[9]

Investment brokers[edit]

Investment brokers (or Financial Advisors, as they have been called in recent years), come in many varieties. Some specialize in organizational retirement plans while others specialize in managing the personal assets of wealthy individuals. The later category come upon an occasional organizational retirement plan in the course of their main business, at which time the pension administration firm is brought in. Investment brokers are generally personable people who are known and trusted within a given community, thereby acting as an effective business channel. Ideally a pension administration firm forms alliances with a handful of investment brokers who specialize in organizational retirement plans. But it is not uncommon to possess a long list of potential referral sources that have only yielded one or two plans in the past. The organizational retirement plan knowledge possessed by investment brokers can range from very high to very low, with the later category depending on the pension administration firm to a higher degree for maintenance of the client relationship. Investment Brokers are overseen by various organizations according to the licensure they carry, including an associated broker-dealer, Financial Industry Regulatory Authority (FINRA),[10] and the appropriate state department of insurance.

Classifications of pension administration firms[edit]

Pension administration firms operate in several different ways. Possibly the most common form is the third-party administrator, (TPA).[11] The third-party administrator is an independent firm that does not sell associated investment products. An example of such a firm is Pension Administration and Trust Accounting (PATA) in Ipswich, MA. [12] A Pension administration firm can also be a division of a larger corporation engaged in the retirement plan business, such as with Principal Financial Group. The term "bundled" is sometimes used to refer to such an arrangement,[13][14][15] with yearly plan maintenance work takes place under the same roof as investment management and custody services.

Investment platforms[edit]

Pension plans, by their nature involve investment of funds for the benefit of plan participants. There are several arrangements through which these funds are held in custody and invested. Traditional pension plans and some older defined contribution plans have one omnibus brokerage account where plan trustees invest participant funds for their benefit. In this case the participants have no control over investment decisions. These accounts are typically held at traditional brokerage houses, such as Morgan Stanley or UBS. The more common arrangement in today's market, however, involves the use of an integrated platform that allows participants to access their account balances through a technology system and change their investment elections as they see fit. John Hancock Insurance and QED Financial Systems are just two examples of a long list of firms offering such services.[16][17]


Beginning in the 1970s technology has played a growing role in the pension administration business. One prime example is the participant access platforms mentioned in the previous section. In addition, many complicated actuarial calculations and statistical tests previously undertaken by hand are now managed through software applications.[18][19] Many business management tools are also now available to provide for workflow management and efficient client communication. Many activities previously carried out through U.S. Mail or United Parcel Service are now performed electronically via secure web connection.

Regulatory presence[edit]

New laws governing the operation of pension plans are frequently discussed and implemented. Recent examples are the Pension Protection Act of 2006 [20] and EGTRRA.[21] These laws, while viewed as a nuisance to many companies who offer retirement plans and pension industry workers alike, are important to the pension administration industry because of significant revenue generation above and beyond standard yearly retainer fees. Updating a retirement plan to comply with legal changes typically can generate $1–2,000 per event, and sometimes more depending on special circumstances. While the laws often take several revisions to address their intended purpose, they usually serve to address a significant industry problem, such as the lax oversight of 403(b) plans in recent years.[22]

See also[edit]