TPA firms raising rates

How are other TPA firms dealing with increasing their prices, and communicating this to their clients?

We have not raised our rates for almost 10 years, but believe it may be necessary now.

Wondering what other firms are doing in this regard. If you have had to raise your rates, how did you communicate this to your clients? What was the impact, if any?

Can anyone share?

Thank you!

While your Q/topic is not addressed specifically in the Guidelines, it is possible your query could be interpreted in a way that looks like "price-fixing".  Generally frowned upon here.  Tread carefully.

In a very general sense, I think this is a common issue for small to mid size TPAs.  Fees stay the same for long periods of time, and then comes the dreaded increase.

This is why I do not like evergreen service agreements.  When I was attached to a decent size CPA firm, pricing and service agreements were reviewed, revised, and sent for signature before work started every year.  

We send an annual engagement letter with a fee schedule attached.  Used to send an updated fee schedule with the census request with stipulation that their providing the census was their consent to the new fee schedule.  Most times, if there is a response, they ask what the old schedule was.  Majority of the clients .... crickets.

R. Scott, here are some things to consider when addressing this challenging topic:

First there is a fundamental reality that you have a business to run and you need to align your revenue stream with your expenses no matter what anyone else is doing. 

To the extent that your fees are paid from a plan, you must disclose the fees to a Responsible Plan Fiduciary in accordance with DOL's 408(b)(2).  It is a good time to review the rules to make sure you consider what must be disclosed, and here are some resources:

• https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf
• https://www.davis-harman.com/pub.aspx?ID=VFdwak5BPT0=

When you discuss fees with a client, you will raise their consciousness that you are a service provider and they pay you fees.  Much like you have not addressed fees for almost 10 years, the client may not have evaluated the fees they are paying you over that same time period.  Essentially, if a plan pays your fees and a client has not periodically re-evaluated your fees, they have not performed their fiduciary responsibility to monitor fees. 

You can expect varied reactions.  A longstanding client that values their relationship with you as a trusted resource likely will not blink at the increase.  A client that see you as a vendor providing perfunctory services will likely shop around.  A client that has had a recent less than pleasant experience with you likely will use the fee as an excuse to terminate the relationship.  A client may be experiencing its own need to reassess their revenue stream versus their expenses and you will be shining a light on the expense of your services.  Hopefully, the client perceives that the value of your services match or exceed your fees. 

As part of this process, you also should address any clients that are vampires.  They consume extraordinary amounts of your time and do not pay you for that time.  You should be ready to have a frank discussion about services you have performed that were outside the scope of your existing agreement.  Be prepared to walk away from any such bloodsuckers.

A few others commenters have suggested what I consider best practices for keeping fee agreements up to date year over year.  You should adopt a best practice and include it in your discussions and updated fee agreements.

Good luck!

41 minutes ago, Paul I said:

As part of this process, you also should address any clients that are vampires.  They consume extraordinary amounts of your time and do not pay you for that time.  You should be ready to have a frank discussion about services you have performed that were outside the scope of your existing agreement.  Be prepared to walk away from any such bloodsuckers.

Absolutely.  A lot of practitioners (not just TPAs) get stuck in  mindset where they don't want to lose clients or do not want to replace clients with high annual invoices.  I have seen people struggle to keep a client that represents 10% of revenue but 30%+ of work.  Most TPAs don't track time or billable hours like CPAs and attorneys do, and it is no doubt a PITA!  What diligent time tracking does do is show how valuable a client is, or if they are a vampire.  

For example, lets assume your hourly rate is $300.  You don't bill your clients $300/hour, but $300 per hour is what you are worth to you firm. The $300 "rate" covers your salary and benefits, overhead, and estimated profit over the year.  If you work 20 hours on a client and bill $3,000, you are only realizing 50% of your calculated rate.  If this rate is calculated to allow you to continue your practice, this client is a vampire, especially if your combined realization rate is less than 100%.   This is something I see TPAs struggle with all the time.

Way back in the day, I shared office space with a wonderful CPA. One day he asked me what my collection rate was. I told him I collected 100% of what I billed. He said "then your rates aren't high enough." I increased my rates 100% and only lost one client.

He also told me to never fire a client, but raise your rates to where they leave. He said having someone say "they are too expensive" isn't really a negative. Now, I haven't kept that faithfully and we do let clients go on occasion. But the lesson stuck and I don't think I (or any firm I've owned or worked with) have ever been much below market except for the rare exception.

Quote

 

I was reluctant to ever raise fees, but my business partner made me see the light.  Rather than just implement a simple fee increase, we used this as an opportunity to rethink and rework our fee structure.  Among the changes:

1.  Moved from billing annually after the annual report is delivered, to quarterly (in advance) on the first day of each calendar quarter.

2.  Increased fees under the new quarterly billing cycle - we didn’t flinch about substantial increases to ensure that the new fees were fair to us and to clients.

3.  Implemented 100% offset of any revenue sharing to quarterly billings.

4.  Started annual fee increases - so it was expected by clients.

We rolled the changes out with a special mailing to all clients - about 4 or 5 months before 1/1 explaining the changes and included what the new quarterly fee would be.  Then we followed that with new service agreements and updated plan level and participant level fee disclosures, as needed.

Our objective was to get it right so we wouldn’t have to go through this again.  The changes were a huge improvement in cash flow, reduced complaints about large annual billings and enhanced us as an attractive acquisition when it was time to sell.

Ah, the vampires. In a prior life, in a galaxy far far away, at a company using a service/fee model that would be completely impractical these days, we determined that by eliminating 5% of our plans and the associated revenue,  we would free up an enormous amount of our time, which could be put to more profitable use. This was never implemented due to corporate politics. C'est la vie.

I just saw in interesting approach. Base fees (not the additional/ancillary fees, which were voluminous) automatically increase each year by the increase in the CPI for the prior year. I will not comment on the fee levels to avoid any perception of being unprofessional or violating guidelines.

1 hour ago, Belgarath said:

I just saw in interesting approach. Base fees (not the additional/ancillary fees, which were voluminous) automatically increase each year by the increase in the CPI for the prior year. I will not comment on the fee levels to avoid any perception of being unprofessional or violating guidelines.

That is interesting.  Would fees also decrease if CPI went down?  If yes, that means you would need to be very careful to get your baseline correct.

Nope. Increase only. If CPI went down, fee would just stay the same.