Do you get what you pay for?
It’s no secret that fee compression is a high focus in the financial services industry this day and age. Increased scrutiny continues to be placed on financial professionals and financial firms, and investors are encouraged to be informed about fees they are paying. Most would agree it is a good thing for regulatory bodies to protect consumers by setting standards and guidelines to ensure the charges they pay are fair and reasonable. Most would also agree investors should be empowered and educated about what and whom they are giving their hard-earned money to. However, what sometimes gets lost in translation is the fair and reasonable part. It seems we have become so preoccupied with shaving off 1 or 2 bps or paying $200 less a year that the value received is not adequately considered.
While cheaper isn’t always better, high-dollar doesn’t always mean higher quality. TRA happens to have some of the best pricing in the business and believe it or not this can be an obstacle for us! Economical feels too good to be true when there are two separate quotes for the exact same services, but one company is offering them at a significant premium. What’s the catch? The fact is TRA is a large, national firm with the scalability to offer our clients competitive fees. Often our competition’s explanation of higher costs places emphasis on the geographical location of the TPA firm being an indicator of accessibility. Working with a local TPA is said to offer comfort in proximity, yet when asked most plan sponsors will say they haven’t seen a representative from their local TPA in-person since they signed on the dotted line. With today’s technological advances, is proximity worth paying 2-3 times more every year for the same level of service? As good ‘ol Warren Buffet says, at the end of the day value received for the price paid is what counts.
Get Your Priorities Straight
On the business retirement plans side, determining value vs. cost can be tricky. While advisors and investors can research and screen investments through analytical tools like Morningstar, FI360, or Zephyr, there is no such screening tool for retirement plan platforms. Instead advisors and plan sponsors must rely on sifting through a slew of biased marketing materials and interviewing wholesalers who, although they may truly have conviction in their products and services, are incentivized to promote them. It’s no wonder the more novice retirement plan shoppers often pick the most obvious comparable factor, price, and place their primary focus on it.
When asked who the best platform provider is, your response shoud always be, “it depends”. Although some services and features are standard with any recordkeeping platform out there, comparing platform providers can be like comparing apples to oranges. The first step in measuring value between retirement plan service providers is determining the needs/expectations of the plan sponsor and participants. Most often a plan sponsor will say cost-management is their #1 priority, but if you ask the right questions it will likely reveal this isn’t the case. Are you working with a small business where the CEO is also the CFO and head of HR and head of business development? They probably are going to want to use service providers who will enable them to outsource as much of the administration as possible. Are you working with a large corporation with a dedicated HR rep who is well-versed in the administration of a retirement plan?
They may be less inclined to pay a lot extra for the administrative bells and whistles they don’t need. Are the participants highly comped professionals who will need more advanced plan design consulting and expect access to their preferred investments? Are they lower income blue collar folks who would really benefit most from high-touch educational programs and simplified resources? Does a fancy website matter if the participants aren’t likely to use it? Once the plan’s needs and primary objectives are determined, here is (a high level) list of features to be mindful of when shopping for providers:
- Outsourced processing of loans, QDROs, and hardship withdrawals
- Outsourced enrollment or terminated employee support
- Preparation of 5500s with a conduit for easy submission
- Routine small account force-outs and location of terminated employees
- Access to annual administrative and plan health review tools
- Flexible pricing methods (asset-based or via investment share classes, ability to split billable fees with participants, negotiable rates, if unbundled will TPA credits be applied to offset your bill)
- Payroll submission services
- Complex plan design consulting, ability to accommodate evolving needs of the company outside of the 401(k) (i.e. defined benefit plans, NQ plans, ESOPs, etc.)
- Integration of multiple plan types with consolidated statements and single-login online access
- 360 integration with payroll provider, plan sponsor technology is intuitive and makes life easier
- Access to 3(21), 3(38) and 3(16) co-fiduciary solutions
- Will provide an annual fiduciary file and compliance checklist
- Offer proactive communication regarding regulatory updates and industry best practices
- Have tools and resources available to enable the advisor to perform proper due diligence
- Open-architecture platform with access to non-proprietary, passive and active mutual funds
- Access to solid-performing target dates and target risk portfolios
- Access to both zero-revenue share and retail share classes
- Self-directed brokerage account options
- In-plan managed account capabilities
- Accessible support via customer service reps, online access, or mobile apps
- Technology offers financial planning tools and educational resources
- Account aggregator capabilities
- In-person educational support, either one-on-one or by group
- Access to webinars or on-demand educational support from the corporate office
- Flexible statement delivery options
Bang for the Buck
It’s one thing for a provider to be able to offer some or all the features you are looking for, but the next question is if they come standard or for an additional price. Do the standard features make sense for the price as compared to other providers? If the price is good but the standard features don’t check all the boxes, is the price still good after a-la-carte fees are tacked on? A great way to organize and analyze features and services vs. costs is to create a side-by-side comparison spreadsheet. This will enable you to eliminate providers who can’t offer the plan sponsor what they need, and narrow down further by examining the costs involved. And, if all else fails consult with a trusted TPA partner like TRA for feedback. TPAs work with all major platforms and will have great perspective to share based on our experience.