Pension Administration
Encyclopedia
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 insure that an organizational retirement plan does not discriminate against the lower level employees while also insuring 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
. There are several professional designations available to those who perform this work, such as those offered by the National Institute of Pension Administrators and the American Society of Pension Professionals and Actuaries
. 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 independand broker network. Examples of firms with which these brokers are associated are Raymond James
, 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
, 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 . 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 . 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
.
, Financial Industry Regulatory Authority
(FINRA), and the appropriate state department of insurance.
. The term "bundled" is sometimes used to refer to such an arrangement , with yearly plan maintenance work takes place under the same roof as investment management and custody services.
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
is just one example of a long list of firms offering such services.
are now performed electronically via secure web connection.
and EGTRRA . 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.
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
, profit sharing plan, defined benefit plan, or cash balance plan
Cash balance plan
A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution 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 insure that an organizational retirement plan does not discriminate against the lower level employees while also insuring 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
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
. There are several professional designations available to those who perform this work, such as those offered by the National Institute of Pension Administrators and the American Society of Pension Professionals and Actuaries
American Society of Pension Professionals and Actuaries
The American Society of Pension Professionals & Actuaries or ASPPA is a national organization for career retirement plan professionals. The membership consists of the many disciplines supporting retirement income management and benefits policy. Its members are part of the diversified, technical,...
. 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 independand broker network. Examples of firms with which these brokers are associated are Raymond James
Raymond James
Raymond James Financial is a diversified financial services holding company whose subsidiaries engage primarily in investment and financial planning, in addition to investment banking and asset management...
, Edward Jones Investments
Edward Jones Investments
Edward D. Jones & Co., L.P., since 1995 simplified as Edward Jones is a financial services firm headquartered in Des Peres, Missouri which serves investment clients in the United States and Canada, through its branch network of more than 12,000 locations. The firm focuses solely on individual...
and Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
. 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
Principal Financial Group
Principal Financial Group is a publicly traded corporation based in Des Moines, Iowa, USA.The Principal Financial Group is a global financial services provider which offers a wide range of financial products and services, and is a U.S. leader in 401 plans. Headquartered in Des Moines, Iowa, the...
, John Hancock Insurance
John Hancock Insurance
John Hancock Financial is a loose term for a United States insurance company which existed, in various forms, from its founding on April 21, 1862, until its acquisition in 2004 by the Canadian insurance company Manulife Financial. It was named in honor of John Hancock, a prominent patriot...
, ING Group
ING Group
The ING Group is a global financial institution offering retail banking, direct banking, commercial banking, investment banking, asset management, and insurance services. ING is the Dutch member of the Inter-Alpha Group of Banks, a cooperative consortium of 11 prominent European banks...
and Mass Mutual, although there are many others. Plans which contain over one-hundred participants must perform an independent audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
each year, necessitating yearly coordination with representatives of a public accounting firm . In cases where a defined benefit plan is being managed the pension administration firm must employ an actuary
Actuary
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....
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 . 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
United States Department of Labor
The United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics. Many U.S. states also have such departments. The...
.
Investment brokers
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 penison 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-dealerBroker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
, Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA), and the appropriate state department of insurance.
Classifications of pension administration firms
Pension administration firms operate in several different ways. Possibly the most common form is the third-party administrator, (TPA). The third-party administrator is an independent firm that does not sell associated investment products. An example of such a firm is the Dana Consulting Group in Chicago, IL . A Pension administration firm can also be a division of a larger corporation engaged in the retirement plan business, such as with Principal Financial GroupPrincipal Financial Group
Principal Financial Group is a publicly traded corporation based in Des Moines, Iowa, USA.The Principal Financial Group is a global financial services provider which offers a wide range of financial products and services, and is a U.S. leader in 401 plans. Headquartered in Des Moines, Iowa, the...
. The term "bundled" is sometimes used to refer to such an arrangement , with yearly plan maintenance work takes place under the same roof as investment management and custody services.
Investment platforms
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 investmentInvestment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
decisions. These accounts are typically held at traditional brokerage houses, such as Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
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
John Hancock Insurance
John Hancock Financial is a loose term for a United States insurance company which existed, in various forms, from its founding on April 21, 1862, until its acquisition in 2004 by the Canadian insurance company Manulife Financial. It was named in honor of John Hancock, a prominent patriot...
is just one example of a long list of firms offering such services.
Technology
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. Many business management tools are also now available to provide for workflow management and efficient client communication. Many activitities previously carried out through U.S. Mail or United Parcel ServiceUnited Parcel Service
United Parcel Service, Inc. , typically referred to by the acronym UPS, is a package delivery company. Headquartered in Sandy Springs, Georgia, United States, UPS delivers more than 15 million packages a day to 6.1 million customers in more than 220 countries and territories around the...
are now performed electronically via secure web connection.
Regulatory presence
New laws governing the operation of pension plans are frequently discussed and implemented. Recent examples are the Pension Protection Act of 2006Pension Protection Act of 2006
The Pension Protection Act of 2006 , 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.-Pension reform:...
and EGTRRA . 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)
403(b)
A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...
plans in recent years.