How to start a plan administration practice.

Listed here are the steps required to tap the pension market for a new and profitable consulting business.

CPA firms frequently field questions from their small business clients about qualified retirement plans. Just as frequently, after getting that professional guidance the clients turn to a non-CPA firm to administer those plans.

That's a major opportunity loss. With the right kind of planning, such business could be retained and made into a profitable specialty of the firm.

Many CPA firms are in a unique position to provide administration services for qualified plans to their clients. After all, they are familiar with clients' financial history and goals. If they fail to capture this business, they may lose yet another opportunity: to expand the relationship by providing personal financial planning services to business owners. This article provides practical guidance for CPA firms considering beginning or expanding retirement plan administration practice.

Before a firm decides to undertake such a highly technical practice, its managing partners should determine the potential market and the scope of services that could be offered. The assessment should include a profile of clients that are most likely to require the services and a marketing study to determine other potential clients and the CPA firms that already are providing the services.

In assessing the competition, the firm's partners should not dwell on competitors' style or services with a mind to emulating them. Firms starting up in this specialty usually discover their range of services is best selected by determining their own business goals and the needs of targeted clients.

If the partners decide to add this practice area, they should examine all plan administration services and determine which they believe will complement the firm's other services. Then they must assess the size and experience of the firm's staff and the gap between their current abilities and the resources the firm will need to undertake the work--including the time, effort and money it is willing to expend to develop those resources.

A FULL-SERVICE PRACTICE

One option, and it's the most expensive one, is to offer all plan administration services for all types of qualified retirement programs in what amounts to a "turnkey" service--from design consulting through plan-termination services. Partners should be aware, however, that the range of qualified retirement programs and service levels is extensive, requiring a significant amount of resources. Turnkey administration services include

* Design-feasibility analyses. This is typically the initial phase for services in the employee benefit practice. It requires some expertise in all types of qualified retirement plan programs. The staff must be able to illustrate the cost of a proposed program (in terms of cash flow, executive and nonexecutive benefits and projected tax savings) and other advantages and disadvantages of a recommended benefit program.

* Implementation. This service involves providing the client with the many documents it needs to begin the plan, which includes plan descriptions, administrative manuals, employee notices, Internal Revenue Service requests for a determination letter, salary reduction agreements, beneficiary designations, survivor annuity waiver forms, loan policies, etc. In addition, hybrid plans may require the assistance of an attorney in drafting some documents. The firm also must consider how it will assist clients in adopting programs that it recommends.

* Annual administration. The type of qualified plan will dictate the annual services the practice will need to develop internally. Annual services can include recordkeeping; contribution calculations; Financial Accounting Standards Board financial reporting calculations; summary annual reports; allocation of contributions; minimum funding calculations; top-heavy calculations; trust accounting; discrimination testing; benefit certificates; reporting and disclosure to the IRS, Department of Labor and participants; etc. As should be evident, the list is extensive.

* Ongoing compliance and consulting. When new or pending legislation or government regulations require changes to the benefit program, clients will expect the consultant to communicate how such changes will affect their programs and the available options. If the practice encompasses design services, it should be prepared to consult in this area. Document services include plan amendments necessary to implement the required changes.

* Termination. Depending on the program, termination services can be time-consuming and intricate. For instance, terminating a profit-sharing plan is much different from terminating an Employee Retirement Income Security Act title IV qualified plan. Professional services in this area can include participant notices, Pension Benefit Guaranty Corp. notification, application for IRS determination letters and distribution calculations assistance.

If it's determined a full-service practice is either too expensive to implement or is not called for from a marketing viewpoint, the other option is to establish a limited-service practice. Once again, the managing partners must assess the firm's area of expertise and interests. Since the fees the firm ultimately charges will depend on the type of personnel needed to complete the service, the partners should determine which projects can be delegated to clerical staff (for example, data entry) and which must be handled by the professional staff.

SETTING UP WORK METHODS

There are two internal work styles traditionally used to handle plan administration projects: the functional method and the client (or team) method. Many administration firms use a hybrid of the two.

With the functional method, the work is divided up and assigned by project or distinct function. For example, a typical job could be broken into these components, with specialists handling each function: actuarial, trust accounting, technical services and research, employee recordkeeping and data entry, government forms, calculations and allocations, review and plan terminations and special studies.

Many CPA firms prefer the functional method because it's efficient and gives each professional the opportunity to develop specialized expertise. Generally, it's best for a small office. The disadvantages include potential confusion over who is ultimately responsible for the client's work and which staff person the client should call with questions, potential inconsistencies in the quality and content of the work and reliance on one or a few people for expertise within a function.

With the client-team method, each team has its own clients. And, of course, the team becomes more familiar with its clients and so is better able to assess their needs. Also, it's clear who is responsible for each client and the clients know which person to call with problems. The disadvantages include the vulnerability of the team's spirit if there is a lack of effective team leadership, an uneven workload and the possibility of billing inconsistencies if hourly rates vary. This method also requires the staff to be more sophisticated than is the case in the functional method because each staff member needs to be familiar with a much broader range of technical areas.

THE SOFTWARE SOLUTION

In this age of computers, specialized software can make pension administration much easier. But there are certain things that a CPA firm should know before buying the software.

When working on a simple pension plan, a Lotus spreadsheet works fine. But once the practice gets beyond simple plans, it may find that it will take a full-time systems analyst to maintain the Lotus program. For example, administering a 401(k) plan requires numerous variable functions for eligibility, vesting, allocation of earnings and, most important, updates for the frequent legislative and regulatory changes.

The alternative is to buy software specially designed to handle administration functions. In making such a purchase, it's important to determine if the program can meet the full range of the firm's practice needs. The firm should determine whether other CPAs who use it are satisfied. Also, the partners should check how long the vendor has been in business. If the vendor goes out of business, the firm may have no one to turn to for technical support, and since tax and pension laws change frequently, there is a continual need for program updates. Here are additional advisories to consider when buying software:

* Can the software be expanded to perform other related functions? Can the vendor supply related programs?

* How good is the vendor's technical support?

* Can the program import and export data from and to other programs?

* How quickly can it incorporate law changes into existing software?

ESTABLISHING QUALITY CONTROL

One of the keys to a successful plan administration practice is staff training. Probably all staff employees will require some degree of training. Obviously, this does not apply to senior management personnel, who are employed for their experience and knowledge, of the subject.

Because training takes time, the firm should not expect any billing production from most staff members in training for at least the first six months. And it should be made clear to all new hires that they will have to undergo extensive training.

With the ever-changing legislative and regulatory environment in the qualified plan area, it's critical that the partner in charge establish an internal structure for the operation, even if it is informal. Once a basic structure is in place, all staff members should participate in refining it. Specific attention should be given to regular planning meetings with an assigned agenda to handle technical decisions, workflow problems, external and internal training schedules, overviews of resource guides, operational inefficiencies and project goals.

When developing internal checklists, the entire staff should be given time to assist with the project. The managing partner should go through each type of service with each staff member from beginning to end. Questions to ask: What steps are involved? What information is needed? Where is the potential for errors?

This type of practice involves lots of forms. As a result, the staff members, in conjunction with the partner, should produce the necessary checklists to develop and refine internal processing formats, such as written communications, technical checklist forms, file memorandums, "buckslips" (evidencing the completion of required processing steps), form letters, client meeting preparation forms, client conversations, external communications and fee process-billable time logs.

Once created, forms and internal policies should be regularly refined. Committees should be assigned to review, improve and update forms and internal control functions, as well as work assignments.

TECHNICAL SUPPORT

The partner in charge will have still other issues to resolve. For example, how will each staff member answer such difficult "gray area" questions as the proper order for distribution of excess Internal Revenue Code section 415 contribution or excess deferrals? Also, what procedures will be established to analyze such problematic judgment calls? And what procedures will be followed to double-check these issues and their resolution? In addition, the partner will have to establish guidelines, for example, for determining the staff member responsible for new legislation and regulation, designing a workbook for completing technical calculations and developing a client inquiry procedure.

It's important to detail the continuing education requirements of all staff members; this should be established by the partner in charge. In addition, the policy should list the steps by which the staff will achieve its educational goals, which may include internal and external classes and conferences and evening classes at local educational institutions.

PRICING FOR FEE-BASED SERVICES

Two methods traditionally are used for pricing retirement plan administration services: the unit charge and time and expense. It's becoming more common for administration firms to use a hybrid of these two methods. For instance, handling a profit-sharing allocation, employee recordkeeping and form 5500 may be a unit charge, using a base fee, plus an additional unit charge for each participant or eligible employee. Charges for additional consulting outside the scope of these services may be on a time and expense basis.

To determine a unit charge, the firm should first decide which staff member will complete the work, who will review that work and what hourly charge will be assigned to each staff member. The next step is to determine the time necessary for each level of preparation and review. The unit charge should reflect the amount of time spent at the hourly rate of the staff members.

After this, a manager should compare the charges with prevailing rates in the local market. If the firm's unit charges are higher, they should reflect the quality controls that have been implemented and result in superior service for clients. Remember, an inferior result at a discounted price is still an inferior result.

The qualified retirement plan administration service area can be exciting, challenging and profitable. Properly planned, a CPA firm can provide this value-added service in addition to the other professional services it is already providing small and medium-sized businesses. But to be successful, the firm's partners must plan entry to the practice carefully.

LISA C. GERMANO, CPA, is president and cofounder of Actuarial Benefits & Design Co., Midlothian, Virginia. She chairs the American Institute of CPAs employee benefits taxation committee and is chairperson of that committee's working group on plan administration practice.

The author acknowledges the help of Kenna Payne, CPA, in the preparation of this article.

EXECTIVE SUMMARY

* MANY CPA FIRMS are in a unique position to provide administration services for qualified pension plans to their clients. If they fail to capture this business, they may lose yet another opportunity: to expand the relationship by providing personal financial planning services to business owners.

* BEFORE A FIRM DECIDES to undertake such a highly technical practice, its managing partners should determine the potential market and the scope of services that could be offered.

* IF PARTNERS DECIDE to proceed, they should examine all plan administration services and determine which they believe will complement the firm's other services.

* ONE OPTION is to offer all plan administration services for all types of qualified retirement programs in what amounts to a "turnkey" service. Partners should be aware, however, that the range of qualified retirement programs and service levels is extensive, requiring a significant amount of resources. A less costly option is to establish a limited-service practice.

* THERE ARE TWO internal work styles traditionally used to handle plan administration projects: the functional method and the client (or team) method. Many administration firms use a hybrid of the two.

* ONE OF THE KEYS to a successful plan administration practice is staff training. Because training takes time, the firm should not expect any billing production from most staff members in training for at least the first six months.

* TWO METHODS traditionally are used for pricing retirement plan administration services: the unit charge and time and expense. It's becoming more common to use a hybrid of these two.