Kickback or Industry Standard?
We currently serve about 1,600 retirement plan clients annually.
This last year about three-quarters of a million dollars came to our office directly from various investment companies.
Something called revenue sharing.
Revenue Sharing impacts more than just TPA’s. But since I’m a TPA I’m going to concentrate on how it affects TPA’s and why you should care. This is my fair warning that Revenue Sharing is a much larger topic with a broader scope than I’m getting into today. I’ll list a few sites below for perusal if you want to dig deeper.
Your 401k plan money is invested somewhere, probably at an investment company. And if you’re using a TPA to do the yearly administrative work on the plan (like PBS), the investment company you use will sometimes give some money to the TPA you’re using.
What? Did you read that correctly? Give money to your TPA?
If you’re keeping up your next questions are:
- Where did the money the investment company is giving to your TPA come from?
- What is your TPA doing with that money and how is it impacting your TPA costs?
- What else don’t I know?
To answer these questions…
It’s complicated, okay?
The two short answers are – in my limited view – the practice of passing on money started many years ago with the laudable idea of helping TPA firms maintain reasonable fees (There’s a great article by ASPPA on this that I’ve included below). Now it’s tradition, and if you give a mouse a cookie…
Where did the money come from?
The money came from your account (thank you by the way). Mutual Funds charge their clients to use their services. Some of that money is passed on to investment companies and then trickles down to…your TPA. So in the end – you are paying for this whether you realize it or not.
What is your TPA doing with that money?
It depends. I’ve included a great article about this sponsored by ASPPA in the links below. In my experience TPA’s will do one of the following:
- Take the revenue sharing and charge their normal fee in addition to the amount received.
- Offset their bill in some way shape or form against some portion of the revenue sharing received.
- Provide multiple fee schedules depending on whether revenue sharing will be received.
- Have all revenue sharing put into a special account at the investment company which can then be used toward plan-related expenses.
- Any or all of these depend on the circumstances.
What else don’t I know?
There’s a lot you don’t know. Plan sponsors will depend on their financial advisors to help them find a great TPA to work with. But revenue sharing can throw a kink in that. It can be very difficult for plans with assets north of $1,000,000 to understand how much a TPA actually charges (when factoring in revenue sharing) and compare that with what other potential TPA’s may actually charge.
So where do we go from here?
My advice for you, whether you are a plan sponsor or an advisor is:
- Find a TPA who does a great job, and damn the torpedoes, I mean the cost. When you look at total plan costs the TPA’s cost will typically be a small fraction of your total costs. You can’t pay enough for great service.
- When comparing costs between potential TPA’s make sure you understand clearly what their costs are after factoring in revenue sharing so that you can have an apples-to-apples comparison.
- Make sure you understand which investments/platform at the investment company you use charges revenue sharing. You can sometimes get the same investments without this added charge (depending on circumstances & plan size).