It is important to understand how any service provider to the 401(k) plan gets paid. Ideally, each and every 401(k) provider would proactively disclose any indirect compensation, and there are fee disclosure regulations effective later this year that will require this. But, if a 401(k) third party administrator (‘TPA’) does not volunteer this information, a business owner should directly ask. It is best to ask the TPA directly and not filter the question through the financial advisor.
A 401(k) TPA’s answer to compensation questions will reveal a lot about the TPA. First, the answer will give the business owner insight into the TPA’s communication style and forthrightness. When asked directly, is the answer to the question with the written proposal materials? Second, if the total compensation including any indirect compensation seems too low, it might be an indication of a low-touch service model. Third, if the total compensation seems high, the business owner will want to ask additional questions to understand the value offered. Lastly, if there is a lot of indirect compensation being paid, the business owner will want to understand how fees invoiced to the business owner will be reduced, if at all.
What type of indirect compensation do 401(k) TPAs receive? Many record-keepers pay TPAs compensation, often called revenue sharing, to help reduce the fees that TPAs charge for plan documents and annual administration. The qualification requirements and amounts paid vary from record-keeper to record-keeper, so it is difficult to state general rules. The term “revenue sharing” is a bit of a misnomer. Most record-keepers have two service models: First, they have a bundled service model where the record-keeper provides the plan document and annual administration services. Second, they have an unbundled approach where a TPA provides the plan document annual administrative services. In an unbundled model, the record-keeper provides the TPA partial compensation for these services through revenue sharing because the record-keeper is not providing the plan document and annual administrative services.
Nova 401(k) Associates participates in a variety of record-keeper revenue sharing programs. We are happy to explain to clients, prospective clients, and financial advisors any indirect compensation that we have or will receive in connection with a 401(k) plan.
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