"Finder's fee" for referring plans to TPA

[Guest Sieve]

Employer (Administrator under the plan) places assets with TPA, who receives commissions on trades/assets. Employer is offered a reduction in the fees that it pays for plan administration when it refers another plan to the TPA (an advantage the employer would not have enjoyed but for the earlier placement of assets with TPA). is this a prohibited transaction: i.e., use of plan assets for the benefit of the fiduciary (employer)? (My thought is that this is a PT, even though the finder's fee is after-the-fact, the placement of assets is a pre-requisite to the finder's fee.)

What if the finder's fee were in the form of a reduction of administrative fees as allocated directly to participants--i.e., a reduction in fees charged to the plan? (I suspect that this is not a PT.)

[jpod]

Would your conclusion be different if the plan document permit the fees to be paid by the plan if the employer chose to implement that?

[J Simmons]

Employer (Administrator under the plan) places assets with TPA, who receives commissions on trades/assets. Employer is offered a reduction in the fees that it pays for plan administration when it refers another plan to the TPA (an advantage the employer would not have enjoyed but for the earlier placement of assets with TPA). is this a prohibited transaction: i.e., use of plan assets for the benefit of the fiduciary (employer)? (My thought is that this is a PT, even though the finder's fee is after-the-fact, the placement of assets is a pre-requisite to the finder's fee.)

What if the finder's fee were in the form of a reduction of administrative fees as allocated directly to participants--i.e., a reduction in fees charged to the plan? (I suspect that this is not a PT.)

Hi, Larry, if it is a reduction in the commissions on trades/assets (assessed against plan assets rather than paid by the employer), then I do not see the reduction-for-referral as the use of plan assets to benefit the employer.

If the employer bears the costs that will be reduced, then I think it depends on when the employer first learned about the reduction-for-referral in relation to when the decision was made to use this TPA. If not until after the decision to use this TPA was made, then I do not think there's a PT. If it was at the time or before, then that's a stickier issue. However, since the employer could have the plan assets paying the TPA fees (reduced or not), is it really a use of the plan assets to benefit the employer? What if the plan were amended to provide that the employer will pay only fees at the reduced rate, and that the other part of the fees are to be borne by the plan itself? Then the reduction-for-referral benefits the plan, not the employer--and the employer is in the same place.

I do think that the reduction-for-referral is a factor that the employer must consider in deciding to stay with the TPA. For example, if the reductions are deep, then it suggests that the TPA might be charging too much in the first place.

[Guest Sieve]

I had not considered it, but yes, jpod, my response to my first query (PT if admin fee reduction goes to employer) would be different if payment of fees by the employer was not hard-wired into the plan--i.e., if the trust provided that fees are charged to the trust if not paid by the employer (which this plan's trust provisions say) or if the trust even gives the employer the option of passing fees on to the plan's assets. John's comments clarified that issue for me.

However, I'm still a little troubled by the notion (which John expressed) that those who already have assets with the TPA might be grandfathered. If referral fees were, for example, paid in cash to the employer, then it doesn't seem to me that whether or not the transfer of assets to the TPA came before or after the commencement of such a program should positively impact the PT consequences of those payments to a year-long client as opposed to a new client who knew of the potential for referral fee cash payments when initially placing assets with the TPA.

Thanks for your thoughts/comments.

[J Simmons]

Larry,

I can see your point. You would consider it a use of the plan's assets that the employer is getting the referral fee, even if the employer placed the administrative services work with the TPA before knowing about the reduction-for-referral spiff. My understanding is that your point is that if the plan was not a customer of the TPA, ergo the plan's management not placed with the TPA, the TPA would not be offering a referral fee to the employer. Worse, this spiff might induce the employer to choose to keep the TPA involved when another option might be better for the plan's participants and beneficiaries (this last point I think invokes fiduciary duties more than PT concerns.)

I think that it is possible that the IRS/DoL/a court could stretch the 'use of the Plan's assets' for the benefit of the employer (a PT) to the point that it would cover this scenario where the employer only learned of the spiff opportunity after deciding, for the plan, to use this TPA and the spiff redounds to the benefit of the employer rather than the plan. But I think that would be stretching the 'use of the Plan's assets' for the benefit of the employer (a PT) beyond the extent to which I've seen either government agency or a court do so to date.

I would be much more concerned, both from the PT and fiduciary perspectives, if the employer knew about the spiff at the time the decision was made to use this TPA. It would be more difficult to defend an employer with foreknowledge of the spiff against PT assertions than it would one offered it only after having chosen to use the TPA.

[Guest Sieve]

Granted, it may be a stretch to find a PT in the case of sponsors whose transfer of assets occurred before the finder's fee was even available--except, I think, if the referral fee were paid to the employer in cash (rather than as a reduction in administrative fees), which I see as a horse of a different color.

But, in any event, I agree with John's assessment that, if the plan permits admin fees to be taken from plan assets, there is no advantage to the employer to receive a fee reduction (since the employer could transfer all fees to participants' assets, if it so chose).

Still, I thought that a PT was a PT, even if advantageous to the plan (unless an exemption is applied for & recevied).