Trust accounting for a pooled plan

[Bird]

We have a plan that we took over as part of a business acquisition some years ago; it is profit sharing only with pooled/trustee directed investment accounts. They went from SF reporting to full 5500 with Schedule H and an audit in the year we took over. They have 4 different investment accounts, 3 are with mutual funds and ETFs with 15 to 20 positions, and 1 with 100+ individual securities (fortunately not a lot of trading in that account). We never really charged enough for the more detailed trust accounting required to prepare the Schedule H, but then in 2022 they moved money (not just cash but fund transfers in kind) and it became a full blown nightmare. We're charging them extra, and are bumping the fees going forward, and getting static.

I explained the nuances (if you can call it that) of plan trust accounting, and it didn't really sink in. Then I made the (big) mistake of saying "well why don't you ask your investment people if they can provide reports specific to plan trust accounting" and now I'm spending more time explaining to them what we need (gains and losses from the beginning of the year) and basically having to prove that what they can provide doesn't work. Setting aside the business decision-making issues, if you are still with me...

...how common would you say it is to have a 100+ life plan that is not on a platform? Any anecdotal comments like "we have a bunch of these" or "we wouldn't touch this with a 10 foot pole" are appreciated. This is mostly to satisfy my curiosity. We run a small shop and don't know how others approach things. I know if we had 100 plans like this we wouldn't make any money.

[CuseFan]

I can see where that would be a nightmare. We see these situations on DB plans, not any more pleasant I can assure you (and thankfully I don't have to deal with that personally any more - but I've been there before).

I would say this is very uncommon for DC plans. Charge a fair price for your time and expertise, those are your "products" so do not give them away. If client balks, let them bid those services out and they'll find out the value. Or ask them to get a quote from their accountant on what they would charge for this (if they were not the plan auditors and could independently do that work). Then maybe they'll have an appreciation for what you do.

Also, the full scope audit can't be inexpensive either. Maybe the time is right to consolidate under a corporate trustee who can provide proper accounting, certified trust statements and enable a limited scope audit (or whatever they call that now), not to mention the likely improved timing for everything - and distribution processing/tax processing.

[Paul I]

The number of profit sharing only plans we serve has dropped dramatically over time with the widespread popularity of 401(k)s and daily valuations.  We do have a handful of clients that are valued annually and that manage their own trust accounts.  Only one files a full 5500.  The other situations where a trust accounting skill set is needed is for plans that are audited with SDBAs where individuals can pick their own brokerage firm.

The expanded capabilities for investment houses and brokerage firms to provide data has made this task easier.  Also, the ability to extract data electronically from pdfs of statements has reduced the effort.

Dealing with asset transfers is particularly painful because of the time delays between the positions leaving one account and the positions arriving in the receiving account.  The financial institutions of either side of the transaction dig in their heels that the FMV is strictly determined as of the date the transaction posts creating a gain/loss not accounted on their statements.  Also, all too often, the financial institutions also do not properly record the cost basis in the security.

The challenge for you is apparently you have been providing this service and not charging for the effort.  The client likely does not appreciate that they have benefited from your largesse.  

Check your service agreement and the description of any services related to the this particular service.  If you are increasing fees, you will have to follow the process for providing notice anyway.  I suspect that you are not the Trustee, and whoever is the Trustee has the responsibility to do the reporting on the assets.  If this happens to be individual trustees at the client and they rely on your work product, then you have been providing a trust accounting compilation service which is not in the scope of recordkeeping services.

You may have an idea what the auditor is charging.  It would be interesting to see if the plan has been subject to a full scope audit.  You likely are not in a position to provide certified financial statements.  Getting a corporate trustee and having them prepare certified financial statements actually may save the client some money and also reduce the effort you need to provide TPA services.

Keep in mind that losing money year over year on a client that does not pay enough to cover your costs is detrimental to your business as a going concern.  It ties up resources that otherwise could be used to build new relationships with clients that pay you a fair fee.

Good luck!

 

[Bird]

Thanks to you both; this was very helpful.

[RatherBeGolfing]

22 hours ago, Bird said:

...how common would you say it is to have a 100+ life plan that is not on a platform? Any anecdotal comments like "we have a bunch of these" or "we wouldn't touch this with a 10 foot pole" are appreciated. This is mostly to satisfy my curiosity. We run a small shop and don't know how others approach things. I know if we had 100 plans like this we wouldn't make any money.

With my prior Employer, a small regional TPA shop, this type of client was 15-20% of our business.  It was probably double that 10-15 years prior.  They were all old/older clients that started as pooled plans, usually with older management resisting going to a platform (some resisting adding 401k and for sure no Roth).  The only way to make this work is realistic pricing.  Many small TPAs undercut themselves when the price tag for the client is high.  So while the billable is high compared to your small plans, you probably make much less money based on the spent.  I would not take on clients like this unless there were other considerations like a good referral source that you don't want shopping around.  

[Bird]

5 hours ago, RatherBeGolfing said:

With my prior Employer, a small regional TPA shop, this type of client was 15-20% of our business.  It was probably double that 10-15 years prior.  They were all old/older clients that started as pooled plans, usually with older management resisting going to a platform (some resisting adding 401k and for sure no Roth).  The only way to make this work is realistic pricing.  Many small TPAs undercut themselves when the price tag for the client is high.  So while the billable is high compared to your small plans, you probably make much less money based on the spent.  I would not take on clients like this unless there were other considerations like a good referral source that you don't want shopping around.  

Thanks for this also. You've pretty much described our situation and I just needed a reality check.

[Nate S]

From a TPA's perspective, trust accounting should be fairly broad, track the deposits & distributions, any change in value is based solely upon the remaining difference from the BOY to EOY values.  A participant statement doesn't care if the change was dividends, bond interest, short-term capital gain, etc.; only the Schedule H does. Have a conversation with the auditor about how much they care about the gain/loss accounting; then have a corporate trustee quote their services to meet the auditor's expectations.  Then remind the client that they have a fiduciary duty around plan expenses, and have the advisor quote his favorite recordkeeping platform.  Pooled plans make little sense in today's service environment, typically only non-liquid or non-marketable assets require such treatment.  And even when those are present, you may be able to get them built into a recordkeeper's model investment product!