Many years ago, I started the idea of creating a law firm that intended to be the Wal-Mart of legal service where I would do wills for $100 and tax returns for $150. The business miserably failed because the fact is that most people wouldn’t pick a lawyer just on price.
Yet, many 401(k) plan sponsors pick the third party administrator (TPA) that is the cheapest and that is the only reason why. Selecting plan providers has to be a prudent process and picking a TPA just because they’re the cheapest is like picking a financial advisor just because they’re your cousin. A process for selecting plan providers has to be prudent, rational, and fair. There are so many factors to consider when hiring a TPA such as technology, competence, plan design expertise, cost, and service that just picking a TPA based on cost is irrational. There are a lot of good TPAs that don’t charge much, but they offer a competent level of service. Yet, there are those that are no frills when it comes to cost and service.
There is nothing wrong with picking a TPA that is cheap, it’s just like with high-cost providers, the costs have to be reasonable for the services provided. There has to be something else out there for hiring a TPA other than they’re cheap. Otherwise, you may have violated your fiduciary duty when things go south with this TPA, especially when that level of service causes a lot of administrative headaches.