Investment Company TPA Fees - 408 - Req'd Info Unavail.

[BeanCounterBlues]

Very popular real-life 401k mutual fund recordkeeper / investment company (remaining nameless to protect its identity) pays TPA percentage of assets quarterly. TPA offset's client invoice for testing, 5500 etc for amounts paid by investment company to TPA. TPA confirms the payment is removed from the plan's assets, not the general assets of the recordkeeper. Remaining balance paid by plan sponsor to TPA (TPA is not related to or affiliated w/ recordkeeper).

Recordkeeper tells TPA that recordkeeper has no mechanism and no plans to break out the paid quarterly fee by-participant. Dollar amount cannot be determined on a by-participant basis. TPA explains to recordkeeper that 408 requires disclosing the dollar amount charged against the account each quarter to each affected particiant. Recordkeeper reiterates its position (no help). TPA tries to decline payments altogether (w/ blessing of plan sponsor) to avoid the obvious participant reporting problem. Recordkeeper says there is no means of not giving this money to the TPA.

What does the TPA do? Decline the business because the required 408 disclosure cannot be made? Send out a quarterly letter to all affected participants stating "here is the amount TPA received in total, a portion of which is charged to each participant account?" A statement of this type doesn't meet 408 based on my interpretation of the req'ts of 408.

Any comments appreciated, thank you.

[KMG77]

Is the amount received a sub-ta fee? 12b-1 fee?

My understanding is that administrative fees only need to be disclosed at the line item participant level if they are being charged to participant accounts and are NOT included in investment-related fees.

"An administrative expense, to the extent not otherwise included in investment-related fees and

expenses, must be disclosed if they are charged to the plan. The notice must explain how the

charges will be assessed (i.e., pro rata or per capital) or affect the balance of each individual

account. These same expenses must be disclosed quarterly (once in any three-month period) in

actual dollars charged to a participant’s or beneficiary’s account in the previous quarter, including

a description of the service provided. The Department intends that these fees may be reported in

general categories such as “recordkeeping” or “accounting” and that a service-by-service

breakdown is unnecessary. This requirement will have minimal impact because for most plans all

administrative costs are included in investment-related fees."

[Peter Gulia]

R Vatalaro, your discussion topic suggests at least some possibility of blurred roles between a TPA’s efforts to protect its right to its fee, or a TPA’s desire to help a client plan administrator or fiduciary meet that person’s duties.

Even with EBSA’s proposed rule on what’s not a “reasonable” service contract, a service provider faced with the circumstances you describe could argue that full disclosure to the hiring independent plan fiduciary (with incomplete disclosure to participants) is enough to meet the “disclosure-and-approval” aspect of the ERISA § 408(b)(2) exemption so that the TPA’s service contract could be an exempt prohibited transaction.

Some TPAs might want to help a plan’s fiduciary negotiate more services from the recordkeeper. Others might prefer to exclude such work from a service contract. Whether a plan fiduciary meets its duties to participants isn’t necessarily a TPA’s duty (if the TPA isn’t, and won’t become, a fiduciary).

Separately, how the plan fiduciary must, may, or should inform participants about the compensation trail you describe is another topic for consideration.

[BeanCounterBlues]

Thank you both for your assistance. Whether the fees are investment related or not, the TPA in this case, who has nothing to do w/ the investments (the investment holder is the recordkeeper, and there is an independent investment agent who receives a commission from the assets) - is getting paid by the recordkeeper / investment holder. This TPA payment is deducted from the participant's account. Can it be considered investment related when the money is used to offset the TPA's invoice to the client for testing and 5500 work? This is not a bundled arrangement.

If the recordkeeper says the funds paid to the TPA are "investment related" can the plan sponsor just go w/ that? Does it not matter that the TPA isn't providing investment related services? That seems to defeat the purpose of the regulation. Maybe I am overinterpreting.

Just to clarify the first post made, the TPA is not trying to protect their fee. The TPA's default billing method is to have the plan sponsor just pay the entire TPA fee from plan sponsor funds, not from plan assets. The plan sponsor does not object to this method. The problem is - the TPA cannot decline the payment from the recordkeeper - so in order to be fair - offsets the plan sponsor's invoice for testing and 5500 (which is all the TPA does).

To address another point - the TPA understands that it is ultimately the plan sponsor's responsibility to disclose what is necessary to the participants. However - the plan in question is very small w/ financially unsophisticated employer, who would rely on the TPA to make the disclosure that is necessary for the funds that the TPA is getting from the recordkeeper. The TPA simply wants to make this (whatever "this" is) as easy as possible for the plan sponsor and is more than willing to fully disclose every cent received to the affected participants.

The problem is - the TPA can't get the information, because the recordkeeper refuses to provide it. Perhaps the recordkeeper is taking the position that the fees paid to the TPA are "investment related" - but in reality that is not what the TPA is performing in the way of services.

This has the TPA very concerned about how to advise the plan sponsor - eg "here's what you, plan sponsor, need to do, but unfortunately the info to comply is not available, and here are the possible penalties, etc."

Can the plan sponsor stay w/ this recordkeeper, disclose what it can to the particpants, and hope that the DOL would see it as good faith effort if reviewed on audit? Just wondering what others would do in this situation. Thank you again.