TPA and financial fees paid to the TPA

[Guest R. Daestrom]

Our TPA company (admin only, no product sales of any kind) is working with a financial advisor who wants to forgo commissions on a new 401(k) plan and instead be paid a yearly financial consulting fee. It is a decent size plan, about 150 expected participants, with the intention that the participants pay the fees out of their accounts. Let's say we would charge $25 annually, and the financial advisor charges $50 annually. At the end of each year, $75 would come out of everyones account to pay for both.

What the advisor has suggested is that the $75 come out at once and paid to our company (TPA firm). From there, we pay him the $50/per and 1099 him at the end of the year. Does anyone else do this and does it seem OK? We want to check as to why 2 separate transactions can't be done; I.E., he gets his check for $50/per directly from the accounts and we get our $25 directly from the accounts. That would seem to be the best way to handle it. But assuming there is a good, legit reason for that not being workable, is there anything wrong "lurking" about if we proceed as he suggested?

Thanks for all opinions

[alanm]

Without knowing more about the advisor, ie, broker working for a broker dealer, or just an SEC registered advisor etc.; it is hard to say. I will assume it is a broker because you said he got commissions. If you are just a TPA and not a broker dealer, you should let him get his fee independent of you. A broker must get approval of the arrangement by the broker dealer, where his license resides, under rule 3040; with that approval, the checks must go to the registered broker-dealer who pays the broker. By you paying him directly and sending a 1099, indicates that process is being circumvented. By handling advisor money, you are being pulled into the advisor-fiduciary loop and you should avoid that. In any case, detailed disclosure on this arrangement should be made to the sponsor and participants. The proper way is: the plan/sponsor signs an advisory contract with the advisor, the custodian is then ordered by the trustee to pay the fee to the advisor or broker-dealer. You should be out of the loop.

[pmacduff]

just another guess...the advisor doesn't want the client to know that he's getting $50 and you're getting $25......

[Guest R. Daestrom]

That's what I was worried about. I believe that this is a broker. I think most major fund companies can make commission/fee distributions from the accounts to more than 1 entity (eg, 1 check to the broker, 1 check to the TPA). Given that I wasn't sure why there was the need to funnel things through us rather than just handle through the normal channels. I will look into further. Thanks for the cautionary advice.

[Archimage]

I thought of some other issues that may come up. What about participants that have less than $75 in their account? How will you collect those fees?

I would also raise the issue that a fee of $75 per participant could be seen by the IRS as unreasonable, especially to a participant that defers a minimal amount on an annual basis.

[E as in ERISA]

I think that we are moving toward more "fixed fees" but also full disclosure of who gets what fees.