Author: Paul A. Carl, CHSA, CPFA™ Vice President, Retirement Plan Consulting, Registered Representative
Previous Retirement Meditations identified retirement plan service providers and discussed direct fees. This Retirement Meditation looks further at payments to service providers, focusing on the indirect aka less transparent.
A plan sponsor searching for a new retirement advisor identified its 401(k) plan service providers. When the advisor asked about fees paid, the plan sponsor replied, “The only fee is $800 paid annually to the TPA.” The plan sponsor’s response made the advisor’s quote of $15,000 appear ridiculous, yet the advisor’s calculations and supporting data clearly demonstrated $7,500 in annual savings if some changes were made.
Here’s a summary of how indirect (or less transparent) fees may be involved.
- Recordkeeper – Recordkeepers often reduce their explicit fee pricing if some proprietary service or investment option is utilized. For example, a recordkeeper may reduce its recordkeeping fee if its fixed account or stable asset fund is used for the plan’s cash equivalent option, or in the event of a conversion using proprietary target date funds. Some recordkeepers have a low-cost solution available by offering a “limited” investment universe (which may mean making 3,000 investment options available instead of 10,000). Others have service offerings ranging from managed accounts to customized participant planning. Each proprietary service or product often results in some type of “discount” from stated, explicit pricing.
- Third party administrator – Why do some TPA’s quote lower base and per head fees than others? Often, it’s based on how the TPA treats revenue, commonly called “TPA offset,” it receives from the recordkeeper. TPA’s quoting higher base and per head fees may use TPA offset to arrive at a net, lower fee to be paid by the plan or plan sponsor. Other TPAs quoting lower base and per head fees will keep some or all of the TPA offset to gross up their total collection of revenue in servicing a plan.
- Investment advisor – The most common form of indirect or non-transparent fees to advisors comes in the form of 12b-1 fees. These are extra charges inside of the mutual fund investment option making same fund different share classes more or less expensive. Some advisors will instruct a recordkeeper to add extra basis points fees to its pricing, basis points that will ultimately be paid to the advisor. Some advisors will quote a flat fee rate at the plan level and charge additional fees for managing models inside the plan that are paid by the participants investing in the models.
Best practices call for plan fiduciaries to know who their providers are, what services are included, how their providers get paid, and how much they receive. Plan fiduciaries should use this knowledge to periodically benchmark to the market. Generally, no plan sponsor is under any obligation to simply go with the lowest cost without evaluating all of the factors.
What’s the total revenue your providers receive to service your retirement plan?
The content of this blog is offered by HORAN Wealth Management, an SEC registered investment advisor. This information is not intended to serve as legal advice or as a substitute for the advice of your own counsel and should not be relied upon as such, as the advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. Linked Websites: We provide links to other sites that we believe may be useful or informative. We do not take responsibility for links to third-party content or the accuracy of the content itself. Any links to third-party sites, or information therein, are not intended as and should not be interpreted by you as constituting or implying our endorsement, sponsorship, or recommendation of the third-party information, products, or services found there. Please note: clicking on external links means you will be leaving this Website; you assume total responsibility and risk for your use of the site(s) you are visiting. Neither the information nor any opinion expressed constitutes a solicitation to use our services or to purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HORAN and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.