Jump to content

How wide are price differences for retirement plan services?


Recommended Posts

About healthcare services, a news article this morning describes wide price variations for the same service—even in the same hospital—based on prices negotiated with a health plan. For example, an injection of Rituximab at Rush University Medical Center in Chicago ranged from $899.33 to $9,260.13, and a vaginal delivery with post-delivery care in Los Angeles ranged from $1,183 to $32,563. Sarah Hansard, Hospital Pricing Data Troves Raise Stakes on Employer Plan Costs, Bloomberg Law Daily Labor Deport (Dec. 18, 2023, 5:05AM EST).

Following size and some other factors, there are price differences for most kinds of services a retirement plan buys. But are the ranges as wide as the examples quoted above?

I don’t disparage price differences. There are many legitimate reasons for prices to differ. Among them: Some fixed costs are about the same for a plan no matter its size. Some variable costs can be much more for a small plan than for a big plan. And some economies of scale, with either a plan or a service provider, can affect costs and prices.

Rather, I hope to learn more about how much prices differ.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

29 minutes ago, Peter Gulia said:

About healthcare services, a news article this morning describes wide price variations for the same service—even in the same hospital—based on prices negotiated with a health plan. For example, an injection of Rituximab at Rush University Medical Center in Chicago ranged from $899.33 to $9,260.13, and a vaginal delivery with post-delivery care in Los Angeles ranged from $1,183 to $32,563. Sarah Hansard, Hospital Pricing Data Troves Raise Stakes on Employer Plan Costs, Bloomberg Law Daily Labor Deport (Dec. 18, 2023, 5:05AM EST).

Following size and some other factors, there are price differences for most kinds of services a retirement plan buys. But are the ranges as wide as the examples quoted above?

I don’t disparage price differences. There are many legitimate reasons for prices to differ. Among them: Some fixed costs are about the same for a plan no matter its size. Some variable costs can be much more for a small plan than for a big plan. And some economies of scale, with either a plan or a service provider, can affect costs and prices.

Rather, I hope to learn more about how much prices differ.

Without getting into to specifics or actual fees, there are some huge differences in the TPA space.  Its usually driven by what is acceptable in regionally.

As an example I know firms in the northeast that charge anywhere from three to six times more for a pre-approved plan document than what I would consider average in the southeast.  Not quite as much as what you describe, but still a huge difference for something like a vanilla 401k on a pre-approved document. Higher cost usually leads to higher fees, but 6X for professional services is a stretch in my opinion.

 

 

 

Link to comment
Share on other sites

At least in the ESOP space so much of the competition is national that I don't see a lot of regional differences.   The firm I work for has business development people working the whole country and if a regional difference that got large happened the national firms would grab the business.  I concede ESOPs is a much smaller world than 401(k)s people are more willing to have their professional not very local.  

On the other hand a dentist or other small firm most likely expects their TPA to be in the metro area.   So I can see more of a regional difference happening in that case.  

Link to comment
Share on other sites

RatherBeGolfing and ESOP Guy, thank you for explaining the presence or absence of regional differences.

BenefitsLink neighbors, are there other factors that result in variations in service providers’ prices (for a same or similar service)?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

1 hour ago, ESOP Guy said:

On the other hand a dentist or other small firm most likely expects their TPA to be in the metro area.   So I can see more of a regional difference happening in that case.  

While not universal, I do agree that many still have a "I want a local TPA" mindset.  Or they simply go with whoever their CPA or advisor likes to use.

Which brings up an interesting question @Peter Gulia If fees are paid with plan assets, when do you draw the line between the benefit received by having a local provider and the reasonableness of the fee?

 

 

Link to comment
Share on other sites

The can be significant price differences for retirement plan services for several reasons.  Here are some examples.

The services that are included or excluded in considering what are "retirement plan services" an vary widely.  Some plans want only very basic services while others want only the best of everything for participants.

There can be multiple service providers involved with plan administration.  Recordkeeping services (plan accounting, transaction processing,...) may be delivered by one provider and compliance testing may be done by another provider.  This is more likely to occur when the plan design pushes the limits permissible by regulations.

There can be multiple service providers involved with investments.  Some plans make all of their decisions about the selection of investment funds and leave participants on their own to decide how to invest their funds.  Other plans engage independent investment advisors who perform annual, semiannual or quarterly reporting.

The service providers may or may not be fiduciaries.  This includes 3(16), 3(38) or 3(21) providers.  Within these categories, there can be limitation on which services the provider is willing to act in a fiduciary role.

Service provider pricing can be influenced by the service provider's overall company relationships with the plan sponsor.  Some companies view retirement plan services as a loss leader with the opportunity to create an additional relationship with a client that generates significant revenue for other services.  Many financial services companies have taken this approach, and so have many accounting firms and law firms.

Service provider pricing also can be influenced by the amount of revenue received from asset-based fees.  Retirement plan services typically are transactional in nature or are based on time worked.  Neither is based on assets.  If pricing for retirement plans services includes an offset for asset-based fees, his is not a big concern until the asset-based fees exceed the fees for services.

There can be pricing differences between service providers simply because some service providers are mindful to increase fees to keep them current with the provider's operating expenses, and some service providers have not increased fees for years.

Some plans have no clue what they are paying service providers.  This is more likely to happen asset-based revenue sharing is used to pay for retirement plan services, and the plan sponsor does not understand the total picture of how much the plan is paying for these services.

There likely are more scenarios.

Determining the scope of retirement plan services and the full measure of the price of those services can be complicated.  Plan sponsors may have varied perspectives on what services they want for their plan participants.  

Bottom line, plan sponsors are charged with understanding what they are paying and with being comfortable that they can justify as reasonable any fees paid by participants.

Link to comment
Share on other sites

For an ERISA-governed plan, a fiduciary must loyally and prudently evaluate and engage service providers considering only the exclusive purpose of what’s best for the plan “solely in the interest of the participants and beneficiaries[.]”

Whether using a local service provider supports an incremental fee might depend on many factors, perhaps including the exact services engaged, how useful and valuable to the plan’s administrator or a participant is the physical nearness of a contact, and how much (or how little) of the work involves using a particular physical location of the service provider or of the employer/administrator.

We might never learn how and where a court would “draw the line” because few ERISA litigations are about plans that might have borne an incremental fee because a fiduciary’s selection was based even partly on geographic nearness.

Often, what’s important are qualities of the service-provider business and its services.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Here’s a factor we haven’t yet discussed:

Might a service provider charge a somewhat higher fee because a particular plan (or a class of plans) poses a risk that the service provider might be dragged into a lawsuit or investigation, or otherwise incur expenses, for something that is not the service provider’s fault but nonetheless results in expenses, which might not be indemnified, and other costs?

Is this a factor in real-world pricing?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

13 minutes ago, Peter Gulia said:

might be dragged into a lawsuit or investigation, or otherwise incur expenses, for something that is not the service provider’s fault but nonetheless results in expenses, which might not be indemnified, and other costs?

This is really a possibility for any plan today.  Look at the forfeiture usage lawsuits where plans are doing something that is permitted by most pre-approved plan docs.

 

 

Link to comment
Share on other sites

Using that example, what’s our guess about how much of a recordkeeper’s or other service provider’s incremental expense won’t be paid or reimbursed by the employer or the plan, or otherwise indemnified?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...