The Third-Party Solution

Stand-alone third-party administrators (TPAs) play an integral role in the smaller end of the 401(k) market. “We almost exclusively use TPAs in the micro plan [less than $1.5 million] market,” says Sean Deviney, a retirement plan specialist at Fort Lauderdale, Florida-based Provenance Wealth Advisors, which works with plans with a few hundred thousand dollars to $35 million in assets. Locally based TPAs often can serve a small client better than a large, bundled provider, he says. “In the micro-market, the effectiveness of a certain plan design can change very quickly; even the slightest change to employee demographics can drastically alter the allocations of profit-sharing contributions. Having a TPA that is able to respond quickly to these changes is invaluable,” he explains.

Traditionally, some bundled providers have shied away from the micro-market, having seen it as lacking in economies of scale, but the micro-market is looking good these days. “Some of our fastest-growing clients in the TPA business focus on the micro-market,” says Andrew Gorder, Charles Schwab Corporate & Retirement Services Director. Among other reasons, he cites the comfort factor for small-business owners of these TPAs’ more-transparent system built around fees for specific services. “It is essentially similar to a full-service offering, with each respective party providing specific core services for a specified fee, as opposed to a plan having to work with a single DC provider.”

With margins compressing on the larger-plan end, combined with providers getting more efficient, the economics of the micro-plan market increasingly make more sense and, given TPAs’ crucial role there, some defined contribution providers are taking steps to win their loyalty. In January, Transamerica Retirement Services launched a new plan-administration platform for TPAs, citing the “remarkable” growth pace of the small- and micro-plan markets. “In the micro-plan space, TPAs play a very important role,” says Stig Nybo, Transamerica Senior Vice President and National Sales Director.

Last year, approximately 26% of Transamerica’s assets and 35% of its plan count were written using a local TPA, Nybo says; all of that business was written with an adviser, since it is an adviser-driven company. “They are often very local, so working with a TPA can give you—the plan adviser and provider—a big advantage in retaining business, and selling it.” In March, Schwab planned to sponsor two regional client events bringing together TPAs and registered investment advisers (RIAs). “We are really trying to create a community with advisers and TPA clients,” Gorder says.

“A micro-plan sponsor wants all the services a large plan would have, even though it is a small plan,” Gorder says. TPAs play a crucial role in providing local, personalized services to micro-plans that a bundled provider may not be able to, he says. As he says, “We view TPAs as the solution in the small and micro-market.”

Transamerica works with TPAs that want to use its recordkeeping platform; it includes enrollment education and due diligence as well as the entire fiduciary-planning package. Schwab takes an open-architecture approach. “TPAs can work with Schwab in a number of ways, including for trust and custody services, recordkeeping, and various back-office support services and practice-management help,” a company spokesperson says. “TPAs can use Schwab’s recordkeeping product [called Schwab Retirement Technol¬ogies], or use another platform. The only stipulation is that they use a system that is capable of interfacing with our platform, which is the case for almost all of the leading-recordkeeping-system providers in the industry.”

Who Hires Whom?

“We get hired by the adviser, nine times out of 10,” says Dale Horst, President of administrator ERISA Services, Inc., in Knoxville, Tennessee. “We do not do any direct marketing.” Adviser Bill Peartree has seen some cases where advisers and TPAs jointly market themselves to potential clients, but the San Diego-based Director of Retirement Services at Barney & Barney LLC mainly sees advisers bringing in administrators. He probably has brought 20 times as many plans to TPAs as TPAs have brought to him, he says.

Not all TPAs gravitate toward the micro-plan market, however. “I think the TPAs that try to get a lot of income from “soft dollars” probably shy away from the small market,” Horst says. “Those of us that are fee-based tend to price ourselves at a level where we know we are going to be profitable,” he says, so serving a micro-plan works as well as any other. Moreover, so-called “producing TPAs,” which also handle investment management and sometimes other services, do not tend to gravitate toward this niche, he adds. Not to mention that advisers are unlikely to introduce them to a client, since they essentially compete to offer the same kinds of services. “If you start producing,” Peartree says, “you are pretty much hunting your own game.”

In the micro-market, TPAs probably have the biggest impact with their plan-design advice. The clients often include people such as a real estate broker or a doctor, in which the business owner wants to find the retirement-plan design that allows him or her to contribute the maximum dollar amount possible. Retirement plans often are a key part of business owners’ tax-planning strategy, Deviney says. “The key is finding a TPA that is proactive about that.”

A TPA will do a tax analysis that shows that owner how to utilize plan design to save most effectively and comply with all the regulations. “Where there is a need for creative plan design, that is where a TPA can add tremendous value,” Peartree says. “Maybe the client has demographics where there are a lot of highly compensated individuals and a handful of non-highly compensated individuals, and they have a problem with discrimination testing.”

Beyond that, an administrator handles many of the behind-the-scenes details, from plan amendments to monitoring salary-deferral limits. “The TPA is going to do the day-to-day administration of the plan, and prepare the Form 5500s each year,” Peartree says. “They also will do all the nondiscrimination testing, and mid-year testing if that is needed.”

“They are doing the back-office work. We are doing the client-communications end of it,” says Deviney. “There is rarely a day that goes by that I do not speak with someone at our largest TPA relationship. They know my business and understand my objectives when designing a plan. Having that understanding allows me to focus on the larger picture without having to reinvent the wheel for every new client.”

“For us, we look to our TPA partners to be proactive with suggesting alternative plan designs for our mutual clients,” Deviney continues. “In my experience, I have never had a larger recordkeeper proactively contact me to suggest a different plan design for a client. Large recordkeepers are much more reactive in that regard.”

The adviser sees his or her role “as really to help with selecting investments, and doing due diligence,” Peartree says, while the TPA provides support, “and we do all the employee communications and education.”

When asked what advisers can do to make the adviser/client/TPA relationship run smoothly, Horst says, from his perspective as a TPA, good advisers in the micro-plan space routinely look at changing conditions, and keep business owners up-to-date on whether it makes sense to think about shifting to another type of retirement plan. He also likes working with advisers who regularly make themselves available to answer questions from sponsors and participants, he says. The advisers who sell a plan and disappear, or reappear only to try to get the owner’s personal financial business, “are the ones who get replaced after three years.”

Selecting a TPA

In the micro-plan market, the big issue adviser Bill Peartree sees with TPAs is service—more specifically, getting good service for the client. “When we bring in a TPA, we think that is a reflection on us,” he says. “It is important for advisers to do their own due diligence on TPA firms. Get to know the people doing the administration, how they work, how big their caseload is, and what size plans they work on.”

When bringing in a TPA, be clear about specific service objectives for the client from the beginning, recommends adviser Sean Deviney. “We set out expectations with a TPA on what turnaround we expect in responding to the needs of clients, whether it is returning phone calls or e-mails, or delivering on something they have committed to,” for example, Peartree says. “The bundled providers typically keep the caseload for administrators at a better ratio, we find.”—and get client references from them.

Peartree looks for TPAs with micro-plan expertise, but not administrators serving so many plans that they probably cannot give much personalized service. Some TPAs serve as the recordkeeper, he says, so you do not always have a separate provider when there is a TPA involved. The industry sometimes refers to a TPA that does both the administration and recordkeeping as an “open TPA,” he adds.

For some TPAs, Peartree says, the micro-plan market is not a big priority. Some may price their services in a way that, if they get asked for anything outside the everyday norm, “the client gets bad service or gets nickled and dimed,” he says. So, before hiring a TPA, advisers should make sure they know whether it charges extra for certain services, what those extra services include, and how they will be charged for the services.

In addition, an adviser needs to understand how a TPA gets compensated, Peartree says. “Typically, the TPA charges the client for installation or setup, plan docs, and administration. There also can be fees for things like loans and distributions,” he says. “These expenses typically are billed to the plan sponsor and/or participant, depending on the expense.” An administrator also could be getting paid by providers, he says, and an adviser should know about any revenue-sharing upfront.

Typical TPA Services

ERISA Services, Inc., a TPA located in Knoxville, Tennessee, cites these as retirement plan administrative
services that it provides:

• Plan design that meets the needs of the employer
• Application of rules and plan provisions determining eligibility for participation or benefits
• Preparation of annual trust accounting
• Preparation of employee-communications material
• Maintenance of participants’ service and the appropriate employment records
• Preparation of reports required by government agencies
• Calculation of participant benefits, and provision of forms for processing of claims
• Advice to plan administrators of participants’ account balances
• Preparation of allocation reports concerning participants’ account balances
• Notification to plan sponsors of need to update documents to comply with legislative changes

*Illustration by Cristian Turdera