Which is Cheaper?

While fees should never be the sole determinant of choosing any vendor or product, fees are always relevant. Sometimes it is hard to unravel 401(k) TPA pricing even when TPA firms fully disclose their pricing, and any indirect compensation that the TPA firm may receive. Additionally, sometimes the employer has to consider which expenses the employer should bear and which expenses participants should bear. It is easy to see this with a couple of examples.

Example 1

The Acme 401(k) Plan gets the following fee quotes from two third party administration firms:

ABC Firm proposes to charge the Acme Company $2,000 per year for annual administration. Additionally, ABC will receive $20 from the Acme Plan for each participant with an account balance. This $20 per participant will be an expense borne by the participants in the Acme Plan. ABC will receive no revenue sharing from the record-keeper.
XYZ Firm proposes to charge the Acme Company $2,000 per year for annual administration and $20 for each participant with an account balance. No per participant charge will be charged to the participant’s accounts. XYZ will receive no revenue sharing from the record-keeper.

Both options cost exactly the same in total dollars. The difference is who will bear the cost.

Example 2

The Acme 401(k) Plan gets the following fee quotes from two third party administration firms:

ABC Firm proposes to charge $5,000 per year for annual administration. ABC discloses that they will receive some revenue sharing from the record-keeper.
XYZ Firm proposes to charge $10,000 per year for annual administration, but as part of XYZ’s proposal XYZ offers to put all revenue sharing that XYZ would have received from the record-keeper into an ERISA expense account.

An ERISA expense account is an account where a record-keeper contributes funds such as revenue sharing that would have been paid to the TPA. The funds in the account can be used to pay for plan expenses such as third party administration, legal fees, and audit fees. The funds in the ERISA expense account can also be allocated to participants.

So, which is cheaper? Well, of course, it depends on the amount of revenue sharing that XYZ would have received. If the revenue sharing is more than $5,000, XYZ’s proposal is less expensive. If the revenue sharing is more than $10,000 XYZ’s proposal is less expensive, and Acme would have funds in the ERISA expense account to pay other plan fees in addition to TPA fees.

Plan sponsors need to get clear disclosures from 401(k) TPAs and ask specific questions about allocation of fees and indirect compensation.

Nova 401(k) Associates is available to discuss with clients and prospective clients options for allocating fees between the employer and plans. Additionally, Nova 401(k) Associates is happy to answer questions about indirect compensation.