TPA due diligence requires weighing more than fees
If I am hiring an attorney or any professional service firm, I want to hire the provider who best meets my service criteria. My buying questions will be focused on their experience and service model. If I like the answer, I will then ask about their fees.
Third-party administrators are often hired by a plan sponsor via an influencer such as an investment advisor or consulting firm. TPAs are frequently approached with questions about services or fees from such influencers. However, it’s not uncommon to hear that the only question that is asked of TPAs when making an assessment is, “what are your fees?”
Engaging a TPA for plan document design, compliance and government reporting services should include more due diligence. If a TPA makes an error, it can be very expensive for the plan sponsor and investment advisor. Another way of stating this issue: If price is the only criteria for investment advisors and plan sponsors, what else do they have on their due diligence files?
Fees are the most common question, but let’s clarify why full due diligence is required when reviewing the services and fees associated with the contract.
TPAs can receive revenue in two ways: Service Contract Fees, where a client pays the fees out of pocket or charges the plan/trust to pay the fees; and the TPA is compensated from the client’s service provider or investment menu
Although revenue sharing must be disclosed, it is easy for TPAs to leverage revenue sharing as a way of charging no or low fees as part of their fee schedule. These TPAs rely on revenue sharing to cover a majority of their revenue. If the buyer is focused solely on the fee schedule, they may select the TPA with the lowest fee schedule, but that may in fact be the firm that receives the highest revenue! The TPA that does not accept revenue sharing or offsets revenue sharing against their fee schedule provide fiduciaries exact information for their buying decision, which puts this approach in the best interest of the participant for plan sponsors that charge these fees to the participant.
Plan sponsors that select TPAs that leverage revenue sharing to present a low-cost solution have made a fiduciary decision that plan participants are paying for these fees, potentially without knowing the impact. The fiduciary rule is very important because it helps prevent cases like this where “fiduciaries” are making decisions that are not in the best interest of the plan participants!
To be clear, TPAs who fully disclose their fee schedules can receive revenue sharing, but the revenue sharing is used to offset the fees. Any and all extra revenue sharing is allocated to the participants. In a nutshell, TPAs are then split into two camps related to their pricing/revenue models; those that strictly use a fee schedule and will not accept a penny more and those that have uncapped revenue via revenue sharing agreements and/or asset-based fees.
Due diligence questions
Now that you know the fee schedules can be misleading, let’s focus on the services performed. If you are shopping for an attorney you will most likely focus on their experience, service model, client target market, services and reputation. The same should be true of a TPA. The following questions should give you a clear understanding of breadth and quality of services.
For TPAs the due diligence should focus on the following:
· What services does the client receive per the service contract? Ask for copies of reports and a list of all services included in the service contract in plain English.
· What are the turnaround times for all services? This should include annual compliance services, plan document, government reporting and distribution reviews.
· What are the communication response times to e-mails and phone calls?
· What is the process for preparing a plan document?
· Does the TPA provide a service guarantee related to accuracy and timing?
· Will the TPA make the plan whole for errors? If yes, is there a required time period for reporting the error?
· Does the TPA have any industry accreditation, such as CEFEX?
· Do any representatives from your firm serve on any national or regional industry boards or committees?
· What are the requirements (in terms of credentials and years of experience) for consultants and administrators that prepare the plan documents and perform the compliance tests, company contributions and government reporting?
(Note: This question is not asking about the management team.)
· Who is responsible for all services? Is there one point of contact? Does a different person perform the compliance tests and company contribution calculations? Does it vary each year?
· Does the TPA have all-in pricing (as opposed to a standard schedule with additional fees charged for refund calculations, QDROs, or non-standard work such as rework due to incorrect census)?
· Request a copy of the E&O insurance and also ask if they have submitted a claim. You may also want to ask if the company has been involved with any litigation related to their services.
Know your fiduciary role
As a fiduciary, make sure you have due diligence documentation for all service providers. The best in the business will have no issue with you performing a due diligence review every three years as it verifies their service models.
So, instead of thinking of fees first, consider what type of TPA you would want if your plan was selected for a government audit or if you are sued by a participant. In these worst-case, but very real scenarios, your due diligence efforts may save you a lot of money.