Offering an employee retirement plan has real upsides for the employer – attracting and retaining key talent is an obvious one. On the other side of the equation is the cost. What does a plan sponsor need to know when choosing the various service providers who help administer the plan, choose investments, and provide custodial/recordkeeping services? While expenses are unavoidable, an employer who understands the range of available services, and the corresponding fees, will be better able to find value for money when choosing services.
Here are key points to keep in mind in the cost-benefit analysis:
Must-Haves: a TPA, an RIA and a Fund Custodian
Third-Party Administrator (TPA). Virtually all plan sponsors rely on the TPA to provide and maintain the plan document, perform the annual compliance testing, and prepare the informational tax return (the Form 5500) for the plan. Additional services may be offered too, such as distributing SPDs and employee notices, and even processing deferral contributions from payroll.
How much will this cost? TPAs tend to charge fees either at a per-participant rate or at a per-plan rate, with typical total expense, for small employers, starting at around $1,500 – $2,500 per year, depending on the scope of services and the complexity of plan design. PEPs (pooled employer plans) and MEPs (multiple employer plans) tend to be on the lower side of this range, because many TPA services are streamlined for such group plans.
TPA Fees may be paid from plan assets or directly by the employer. Note that the law requires the TPA to disclose its fees to the employer in writing, and it’s the employer’s duty to ensure that it receives this disclosure.
As pricing can vary widely, ask a prospective TPA about all of their available services and pricing, and don’t stop asking questions until you understand what they do (and what they do not do) for the plan. Some services that cost extra may be more cost effective for the employer in the long run, if they spare the employer having to handle tasks in house. For example, how will salary deferral deposits be transferred from the employer to the plan each pay day? Will the employer handle it, or will the TPA?
Registered Investment Advisor (RIA). Today, nearly every defined contribution plan offered by an employer, such as a 401(k) or 403(b) plan, allows participants to choose their own investments from a fund line-up curated by the employer. Creating the fund line-up is a fiduciary act under ERISA, which carries heavy legal liability for the employer. This duty can never be fully delegated, but an RIA lightens this burden by providing expert advice on plan investment options, or by creating the investment line-up themselves, as a co-fiduciary.
It is a truly rare employer who does not require expert advice on appropriate investments to offer to their participant population. An RIA provides excellent value for money by helping the employer meet its fiduciary obligation to select plan investments with the care of a prudent expert, as ERISA requires.
How much will this cost? Typically, RIAs fees are calculated as a percentage of total assets held in the plan, expressed as “points” or “basis points” equal to hundredths of a percent; for example, an RIA fee of “75 points” means their fee equals .75% of plan assets under management. Less commonly, an RIA may charge a flat fee, or an hourly rate, particularly for new plans. RIA fees are permitted to be paid from plan assets, but may be paid by the employer instead. As with the TPA fee, an employer is required to receive a disclosure of current RIA fees in writing.
As with any service provider, it is imperative to select an RIA carefully, to understand exactly how much they charge, and to be fully aware of the nature of the services to be provided in a written contract. As with the TPA, the employer must understand its own role in the investment advisory relationship and must maintain regular communications with the RIA.
The scope of RIA services generally comes in two sizes, up to the employer to choose—
- An RIA may monitor and review the plan’s investments to prepare recommendations about the line-up for the employer’s approval (known as an ERISA 3(21) fiduciary); or
- An RIA may themselves decide what investments will be offered in the fund line-up (as an ERISA 3(38) fiduciary).
Regardless of the scope of the RIA’s services, the employer must interact with the RIA regularly and maintain a firm understanding of the investment piece of the plan, which forever remains the employer’s fiduciary obligation under ERISA.
Investment Fund Custodian. An employer retirement plan is a trust, a legal entity that is separate from the plan sponsor. A fund custodian is a regulated financial institution hired by the plan sponsor to safeguard the assets in the trust, to settle investment transactions as instructed by plan participants, and to accurately allocate earnings and losses to participant accounts. Most custodians also maintain the plan’s financial records and prepare tax reporting on distributions – this is called plan recordkeeping.
The custodian is usually not a plan fiduciary, as it has no discretion in directing investments nor any control over the use of plan assets. It may be a bank, credit union, savings and loan association, trust company or an IRS-approved firm. The custodian may hold securities or other assets in electronic or in physical form.
How much will this cost? The fees charged by the plan custodian are usually calculated as a percentage of plan assets, typically starting at <1% and may range upward to several percentage points, depending on the size of the plan and the specific investments held by the plan. Included in that amount are fees charged by the particular funds in which the plan may be invested at any given time. The custodian typically collects its fees directly from the plan participant accounts. The plan is required to disclose these fees regularly to the plan participants and also on the Form 5500.
In this relationship, the employer’s role, as the plan fiduciary, is to monitor and ensure the accuracy of the custodian’s records and fee disclosures, and to ensure that investment fees are a reasonable amount.
The plan sponsor should document their process for selecting the plan TPA, RIA and fund custodian, either in minutes of a plan committee meeting, or, if there is no committee, in a memorandum for the plan’s records. As with any decision affecting the plan’s operations and assets, the choice of a service provider is a fiduciary decision that should be on the record for future reference.