TPA and asset-based fees, w/o revenue sharing agreements

[Guest xplan]

Can a service provider charge an asset-based fee to the Plan and not be considered a prohibited transaction? I know that Investment Managers can justify doing this for managing the Plan's assets, but it doesn't smell right for a straightforward service provider to do so. In addition, they are receiving a per participant fee for recordkeeping services.

Does the "no more than reasonable compensation" exemption apply in this case? In addition, the TPA does not have any revenue sharing agreement with the mutual fund companies to do this. I feel this may be problem, but I am hoping someone can tell me otherwise.

Thanks

[Jon Chambers]

I'm not sure why an asset based fee would be a prohibited transaction. Of course, the aggregate fee needs to be reasonable.

We do numerous vendor searches for recordkeepers and other administrative service providers. We generally don't recommend providers proposing asset based fees for administrative services, because these fees will grow over time, and may go from reasonable to unreasonable without the Committee noticing it.

[Guest S FISCHER]

xplan: I've seen asset based fees being used more and more frequently as the competition grows in plan administration. Sometimes called a trust accounting fee, it is low and attractive to the plan sponser at plan inception. However, if it continues to grow in popularity and becomes abused, I'm sure the DOL will step in(if not already).

[Guest Mike Kimball]

What about a situation where a TPA has taken over the record keeping typically performed by a transfer agent for a fund family, and charging fees for this service? Do you think it matters if the fees are charged to the plan or paid by the fund family to the TPA for providing this service (and ultimately reflected in the fund's investment return)?

[Guest xplan]

My concern is "reasonable compensation." Any time an asset based fee is being assessed for non-investment advisory services, the question I raise is whether or not the assessment is reasonable for the ongoing administration of the plan. I don't see a problem if they are offsetting their per head fees with any sub t/a they receive, but when they don't, it becomes a matter of opinion as to whether or not the "TPA initiated" transaction constitutes a PT due to the reasonability of the comp.

I may be a little too fee conscious for my clients, but in this day and age you need to be. Does anyone know of any case study which may either support or contradict my opinion?

[MoJo]

Are there any other parties involved that the TPA has to pay (i.e. a broker/consultant)? I'm seeing more plans wrapped with an asset based fee to provide compensation to a variety of other parties that may have brought the business in, or may be performing some additional service (some legitimate, some not so legitimate) on behalf of the plan.

I agree with the prior posts - the issue isn't one of the fee being asset based, but rather whether the comp is reasonable in the aggregate - which is something that needs to be monitored on-going.