Broker v. TPA

[Guest Quacka]

I have a client who has a broker (a friend of the owner, surprise surprise) that is steering them towards a particular TPA, and the CFO has the feeling this is motivated by selling of a product. She wants to understand what is going on and what value the broker is adding. They have a small employee population (less than 50).

I am not familiar with the role of a broker in 401(k) set-up and administration. Can somebody provide some general info. on the broker's role and how the broker and TPA are compensated? (and the issues to be concerned with)

Thanks!

[GBurns]

The roles vary on a case by case and provider by provider basis.

In general, a broker is a product and/or service sales representative and could represent the TPA, any service provider or both. It depends. Sales representatives (brokers) and the TPA are no different from any other business. The purpose of business is to sell product at a profit. I am sure that your company is no different.

Also, a TPA like any other company sells its services and products by using sales representatives. They are sometimes called brokers.

What is meant by the term "broker" in your case could be different from another case.

The roles, in this case, have to be defined for you, by the broker and TPA themselves. Full disclosure of roles, compensation, relationship and product information is normally freely given and most is required by law.

[hr for me]

We are small and here is how ours works:

(1) The broker is paid by the recordkeeper (American Funds). AF requires that we use a broker to use their recordkeeping since we are so small. I do not know if it is required for larger plans or not. She does suggest fund changes and provides some educational material and help to employees if they contact her. I often know more about 401k issues than she does. She is more on the investment side and knows way more than I do on that front.

(2) We also have a TPA who does all our compliance work and legal paperwork (plan docs, amendments, loan paperwork, nondiscrimination testing, etc). If we were not 100% vested, they would also do our distribution calculations. To my knowledge, I have never had a participant talk directly to them. We pay them a quarterly fee plus $x per participant. Usually between $1500-2000 per year for about 20 participants.

(3) The recordkeeper does all the other work keeping track of money. They are the ones who provide the online access site to employees. They are the ones I send biweekly data to, etc. We do not pay them at all. Instead their fees are directly within the investment returns of the funds. Each prospectus tells how many basis points are charged. I don't remember off of the top of my head what they each are, but they are reasonable. And on most days, I find them to be the most helpful of my 3 choices.

Now in the past and depending on the setup, the same person/company could be all three or could be separate. Ours are separate. When I worked with Mercer HR Consulting, we did all three for clients,but did have a separate trustee setup....if I remember correctly.

[K2retire]

I work for a company that acts as both TPA and recordkeeper. We charge an annual fee to the plan sponsor for the TPA services. We are paid for the recordkeeping services as part of the management fees collected by the mutual funds. To invest in these particular funds, one must use a brokerage firm. The broker is paid a commission from the fund sales charges.

As mentioned above, every situation can be different. Keep asking until you get the answers you need.