TPA receiving fees from investment product

[Guest TookThePlunge]

I recently opened my own TPA firm, and am now building relationships with the various 401(k) wholesalers, which like to tell me that they offer "incentives" for bringing them business.

With all the stink about transparency of fees, and only charging reasonable fees for services rendered. I'm wondering what your opinions are about accepting these incentives.

My services are outlined in my engagement letter along with fees associated for those services, and I agree that if I receive money from the investment company, they should be disclosed to the clients.

How do you justify receiving these fees? My thought is that these fees will allow me to provide additional "handholding" services for the client. Rather than start the billing clock every time I pick up the phone, or talk with the broker, CPA, etc., I can feel good about accepting the fees. But then, I feel like I need to track the time anyway to justify the fee just in case the client challenges it.

Would anyone be willing to share how they are handling this?

Thanks!

[Guest BXO]

Do you intend to disclose the "incentives" and are they reasonable? If "Yes" and "Yes," then I don't see what the issue is. It is part of your overall operating basis. Without the incentives you would, presumably, have to charge the client more.

[Guest TookThePlunge]

Maybe an extreme example would illustrate my concern.

What if you had the perfect client, where nothing out of the ordinary happened, and the only services needed during the plan year were covered 100% by my fee schedule. If I received the income from the investment product, but didn't provide any services that would have warranted billing out an amount equal to those fees, what do I do? Somehow rebate the fees? return them to the plan?

I'm just trying to wrap my mind around some of the possibilities....you never know what could happen.

[Locust]

You have to stay in business and when you're just starting out, you'll need everything you can get. Your established competitors are taking full advantage of every compensation opportunity, and if you don't they will either underprice you or get paid more for the same services - in either case that puts you in a bad competitive position. I would do what everyone else does, provided of course that you treat your customers fairly. I am not in your business (thank you thank you), but my impression is that TPAs and investment advisors oo not disclose actual amounts received, but disclose only that they have arrangements that may result in additional payments. I'd want to get as much information as possible about what others are doing. The herd principle (do what everyone else is doing and you're probably ok) applies here. This forum won't give you the information you need - join an association of your peers.

[TLGeer]

I recently opened my own TPA firm, and am now building relationships with the various 401(k) wholesalers, which like to tell me that they offer "incentives" for bringing them business.

With all the stink about transparency of fees, and only charging reasonable fees for services rendered. I'm wondering what your opinions are about accepting these incentives.

My services are outlined in my engagement letter along with fees associated for those services, and I agree that if I receive money from the investment company, they should be disclosed to the clients.

How do you justify receiving these fees? My thought is that these fees will allow me to provide additional "handholding" services for the client. Rather than start the billing clock every time I pick up the phone, or talk with the broker, CPA, etc., I can feel good about accepting the fees. But then, I feel like I need to track the time anyway to justify the fee just in case the client challenges it.

Would anyone be willing to share how they are handling this?

Thanks!

Disclose, and then offset against your fees.

Tom Geer

[John Feldt ERPA CPC QPA]

What if you had the perfect client, where nothing out of the ordinary happened, and the only services needed during the plan year were covered 100% by my fee schedule.

You had time to set things up with that provider, you have hardware and software maintenance agreements and training to use their system - this all adds up to time costs and hard charges. Their payment is to cover this. Your fee is for ongoing administration regardless of the asset provider/system they use. Disclose these arrangements: yes. Charge appropriate fees: yes. Make a profit so you can stay in business: required.

[Guest TookThePlunge]

Thanks for the insight everyone!

[stephen]

One such firm discloses the difference and refunds the excess 12b-1 fees to the plan as earnings.

[Effen]

My vote is with Tom Geer. Disclose all revenue & offset your fee.

TPA recordkeeping is full of shady situations, that is why Congress wants more transparency. I would want to know what your competitors are doing, but I wouldn't set my policies based on their bad practices.

[Lori H]

We do A LOT of hand holding. If the asset manager wants to provide us what is usually a small percentage of the plan assets, then I have no problem accepting that as a payment from the manager and disclosing it to the client.

[Jim Chad]

I also use it to offset my fees. But often the amounts are so small it is hardly worth the trouble.

Lori, Your approach has my interest. How do you disclose this to your clients?

[Lori H]

Simply include it in our cover letter with our annual admin. It usually amounts to very little as well per client. Lunch money, however, we get quarterly payments which are broken down by plan. Also, it seems as if these incentives are being amended towards producing new clients(3 a year seems to be the standard) and since we do not sell/promote products, I doubt this incentive will be much of an incentive for us.

[Guest Happy Actuary]

We have always credited 100% of rebates. It is a strong selling point for us. We are rebating > $ 100K per year. I also share the fee disclosure concerns that others have expressed.

[John Feldt ERPA CPC QPA]

How do you determine each client's rebate? Based on average annual assets? Based on monthly or quarterly average assets (or daily?) Or is it based on a ratio of hard-dollar client fees paid vs actual time-spent by your staff (so the most profitable/easy clients get the most rebate and are kept the most happy)?

What if the asset provider, in addition to a basis points type payment, also pays a one-time special bonus based on several criteria linked to your firm's new business added during the year, with one criteria linked to your overall book of business. Would you rebate that amount just against the new clients' bills (the new clients being the main reason for the bonus), or instead would you rebate that in a similar fashion as inquired about above?

I think some have found simplicity in just charging the slightly lower fees to begin with (taking some risk in case if they don't meet the requirements), and disclosing the potential fee arrangements, and thus not jumping through too many hoops to determine how to offset the fees in a fair manner.

[Guest Happy Actuary]

American Funds and JH tell us the $$ per client.

No doubt it is easier to finesse it and not rebate. In addition to mandated disclosure concerns, I think there could also be issues under codes of professional conduct.

[pmacduff]

JH discloses the TPA Forum comp on the Schedule A every year.