My 2 cents on a TPA’s Asset Based Fee

I got a call not too long ago from a financial advisor about my practice and how I price my work on a flat fee basis. I told the advisor that I charge $2,000 for a volume submitter retirement plan and the advisor asked me if the price differentiated if the plan had thousands of participants. I understood his question and I kind of thought it was funny because for me, drafting a plan for one person or drafting one for thousands of employees is about the same amount of work. I told him that the number of participants have no bearing on my plan document work and participant account is more interest for a third party administration (TPA) firm who has more expense in administering a retirement plan because of the amount of sub-accounts they have to set up (if the plan is a defined contribution plan) or benefit statements they have to provide (for a defined benefit plan).

For the longest time, I wanted to write an article on the asset based fee for TPAs. Happily, Sanders Booze in their blog reference an article by Nevin Adams about the asset based fee, which brings up a pet peeve of some TPAs pricing.

I’m no expert on TPAs, but I assume the only fee that may go up with an increasing plan asset size is the custody fee because regardless of the size of the plan, a plan is paying 6 to 10 basis points in a custody fee for a daily valued no transaction fee 401(k) platform (despite the up to 25 basis points my old TPA charged for the daily platform custodial maintenance fee). Otherwise, there is no extra cost for a TPA to run a 100 participant, $100 million 401(k) plan than it is for a 100 participant, $10 million plan.

So I am flabbergasted by some very well known and well regarded TPA firms that charge their administration based on assets. Having them charge on assets is not much more different that me charging plan documents, based on participant headcount. I know if it’s OK if it’s disclosed, but it still doesn’t make sense to me. Call me old fashioned, but I think a fee should be relevant to the work involved and assets bear little relation to the work of a TPA.

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2 Responses to My 2 cents on a TPA’s Asset Based Fee

  1. Jackie Carmichael says:

    BRAVO! Can you hear my applause for your article? I own a small TPA practice and we charge the traditional way — base fee plus a per participant head count. I am astonished that firms can retain clients on an asset based arrangement.

  2. T Bick says:

    Your points are right on target.

    But in the past 35 years I’ve never seen a service provider, nor have I worked with a client that would not apply the economics of scale in an example such as you describe, to reach a proper conclusion relative to pricing. Upon close examination you should find appropriate adjustments in asset based fees to match the revenue to the expense associated with the arrangement.

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