More Than Meets The Eye
How many parties should be involved in making a retirement plan work? For a growing number of advisers, three (adviser, plan sponsor, and recordkeeper) is not the charm. For those advisers, the fourth, invaluable partner is a third-party administrator (TPA).
Yes, recordkeepers frequently are referred to as TPAs and, yes, most TPAs still provide recordkeeping services. However, plan administration has grown ever more complex, and plan sponsors increasingly are looking for a more consultative approach to plan design, compliance testing, and the like—and there is a whole “new” generation of TPAs ready, willing, and able to provide an expanded level of support to plans and plan advisers alike.
An adviser often will run into two types of TPAs, says Marcy Supovitz, Principal at Boulay Donnelly & Supovitz Consulting Group, Inc.: a full in-house recordkeeping and administration firm, and those who do the administration and consulting but use a national provider for the recordkeeper. In her opinion, TPAs who do not do the recordkeeping are able to be more hands-on with the plan, while those who focus on the total administration, including recordkeeping, are very transaction-based. Then, of course, there is the producing TPA, which is often in competition with the adviser because the company serves as broker of record, Peter Coleman, managing partner, The Benefit Practice, explains, although the firm might still use an outside recordkeeper to service a plan.
Many advisers find that developing relationships with a handful of TPAs that can work with their preferred providers helps them deliver a cohesive service model, says Thomas Patnode, wealth management adviser and retirement plan specialist at Northwestern Mutual Financial Network. While not all providers will work with a TPA in the mix, in general, comments Patnode, even those that prefer to offer bundled solutions will do so.
Geography is generally a consideration when choosing a TPA, experts agree. Many advisers enjoy having a local presence so, Supovitz explains, advisers need look no further than their local listings. Advisers also can seek the recommendations of recordkeepers or CPAs they currently work with, Coleman suggests, as well as their broker/dealers. Patnode was referred to a TPA by a wholesaler at a recordkeeper who was trying to help him bring costs down on a plan. Regardless of the source, it is key to find a partner that is a good fit, and that requires not only understanding its business model, but what the adviser is looking to get out of the relationship.
Coleman suggests interviewing the TPA about its business, the longevity of the firm, and the tenure of the adviser’s contact. As with any business relationship, it also is important to know the TPA’s range of plans it works with, what platforms it uses, as well as what its “sweet spot’ is for plan size and type, and how much adviser business it has. Knowing whether plans are done in-house or outsourced is key (for example, some TPAs might do defined benefit work but not have an actuary on staff), as is the amount of errors and omissions (E&O) insurance, Coleman continues. Lastly, Coleman suggests posing the question: “How can you help me?’
While the fundamentals of the TPA’s business are important to understand, Andrew Gorder, Charles Schwab Corporate and Retirement Services director explains, an adviser should make sure he is looking for products and services that support what the adviser is trying to achieve. For example, he says, if an adviser thinks his value is in creating custom portfolios, can the TPA and recordkeeper facilitate that? Likewise, Patnode says, if he wants to be the one delivering all the educational meetings, is that OK with the TPA?
The partnership should consider more than just services, however; it boils down to the adviser and his business model, Patnode explains. “When prospecting for TPAs, it is almost equal to having a new employee,” Gorder says. “You want to be looking for a similar service culture.”
Building a Strategy
“[These days] advisers and TPAs are being much more strategic in choosing partners,” Gorder comments. Advisers should remember that, even if the relationship is not contractually formalized, roles and responsibilities need to be clearly defined. Advisers should look for a third party who is able to help the adviser broaden his business, he says. It could be that an adviser is lacking a presence in a particular region, or it could be to help with a particular plan design focus, such as executive benefit programs. In addition, for advisers not willing—or permitted—to sign on as a co-fiduciary, the TPA sometimes can do that, says Robert Paglione, CEO, Benefit Consultants Group.
TPAs generally are very flexible in their fee models, offering both set fees and revenue-sharing arrangements, comments Hugh O’Toole, Senior Vice President and Head of National Sales & Distribution for MassMutual Retirement Services Division. Supovitz says a normal TPA fee schedule includes an annual base fee and per-participant fee. While she says it is pretty rare for a TPA to have an asset-based fee, there might be a nominal subsidy from the provider to the TPA.
Like any relationship, one that goes bad between an adviser and TPA usually starts with a lack of communication, O’Toole says. It starts with a blame game that, inevitably, will harm the relationship between the two parties, but also can be a problem with the client. The relationship should be collaborative, not competitive, he says. Paglione agrees, saying he is interested in finding “advisers that don’t throw us under the bus. We are a team working in conjunction on behalf of the client.”
Ultimately, advisers need to remember that the TPA relationship “is as symbiotic a relationship as exists,’ Gorder says. “One absolutely succeeds because the other is succeeding.” On the flip side: “Like it or not,” John Moody, President of Matrix Settlement & Clearance Services affirms, “the TPA and adviser are attached at the hip. If someone gets fired, usually they both get fired.”
*Illustration by Chris Buzelli