The introduction of mutual funds into 401k plans in the 1990s created hundreds of thousands of new plans due to indirect payments known as revenue sharing. Some unscrupulous marketers touted plans as being free because the company sponsoring the plan did not have to write a check. Most employers now know that retirement plans are not free and the days of revenue sharing are numbered but is it time for administrative and advisory service providers to stop charging asset based fees all together?
That’s the argument of a well-known TPA based in Alabama who suggests that all administrative charges except for custody should be direct fees based on the number of participants in the plan as well as the services provided. Take record keepers – their services are generally based on the assets in the plan but their costs are driven by the number of people they have to service.
Comparing two companies with the same headcount receiving the same services, the Alabama TPA offer the following situation:
- Company 1: Pays 0.78% (78 basis points) annually for administration services.
- Company 2: Pays 0.27% (27 basis points) annually for administration services.
Company 2 has the better deal, right? Wrong.
Company 1 has only $300,000 in assets and is paying a total of $2,340 for its administration services. Company 2 has $3 million in assets and is paying a total of $8,100 for its identical administration services. Company 2 is paying over three times more in actual dollars for the exact same service!
That same analysis may hold true for plan advisors whose cost are based on services provided and the number of people in the plan. Think about other professional service firms like attorneys – would they base their fee on the revenue of the company? Plaintiffs lawyers are fee based but they only get paid if the suit is successful.
With more lawsuits as well as increased scrutiny of defined contribution (DC) plans by the DOL like 401k through audits, transparency rules (408b2) and now the pending fiduciary rule, companies have to more thoughtful on how they run their company’s retirement plan for the benefit of employees. Negotiating direct payments to providers like record keepers, TPAs and advisors based on the work they do, not asset in the plans, may be a prudent business practice and a hedge against liability.
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