Running a non-producing 401(k) TPA is usually considered to be a low-margin business. The average revenue per client tends not to be all that much, and there is a lot of work to be done for that revenue. Many 401(k) TPA owners grew to be owners of TPA firms after years of working on the technical compliance side of the business.
A 401(k) plan may have three providers: a record-keeper, a financial advisor, and a 401(k) TPA. Generally, each of these providers is independent, and it is usually possible to replace one of the three while keeping the other two.
Many 401(k) TPAs are small businesses – sometimes just the business owner and a couple of employees. That is actually how Nova 401(k) Associates started in 2000.
In the sales process, an employer may or may not meet anyone from the 401(k) TPA’s office. If the employer does meet someone from the TPA, it is often the TPA firm owner or a polished salesman with good hair. But, after the plan is an established client of the TPA firm, who will the employer talk to when they have questions? The TPA firm will probably be available for escalated issues, but not for day to day questions. The salesman will be on to the next prospective client. TPA firms typically use one of two service models: a team approach or a dedicated account manager.
Some 401(k) TPA firms have an internationally based subsidiary or outsource to international outsourcing firms. As the economy becomes more and more global, this should not be surprising. A variety of professional services, including accounting and legal services, are increasingly being outsourced abroad. International outsourcing is a trend that is likely to continue. Some employers may prefer to work with a firm that only has US operations. But, all employers will want to make sure that they understand how and where services are being delivered.
Some 401(k) TPAs outsource some of their work to independent contractors, to US based outsourcing firms, or international outsourcing firms. There is nothing wrong with outsourcing, but plan sponsors and trustees have the right to know about such arrangements before retaining a third party administration firm. In some cases, outsourcing is used to reduce cost or smooth out workflows. In other cases, a small TPA firm may occasionally use an independent contractor to perform peer review to ensure the quality of their work product and that the TPA firm is keeping current with all laws and industry developments. Or, a 401(k) TPA may engage an outside expert to assist on specialized engagements.
In industry speak, 401(k) third party administrators (TPAs) fall into two broad categories: producing TPAs and non-producing TPAs. Neither of these is necessarily better. These are just two different business models.
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.
Some record-keepers pay 401(k) TPAs revenue sharing to help TPAs keep plan document and administrative fees charged to mutual clients lower. Each record-keeper’s program varies in which TPAs qualify and how the amount of revenue sharing is calculated. Many TPAs have some clients where they receive revenue sharing and some where they do not. There are several ways that TPAs handle revenue sharing amounts.
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.