Just one among the many difficult aspects of learning to run a retirement plan is coming to appreciate the sometimes subtle, but clearly critical, differences between a recordkeeper and a third-party administrator (TPA)—a task made all the harder by the near-constant evolution in business models, technology and client service preferences.
Both types of service providers help the plan sponsor keep its plan running smoothly, from a disclosure and monitoring standpoint, for example. In fact, there are firms with the capability of offering both services. Many plan sponsors have a bundled arrangement, where the TPA and recordkeeper are one and the same; in an unbundled arrangement, a plan sponsor hires both a recordkeeper and a standalone TPA. So how do the two types of providers differ?
According to Jack Stewart, new business director for Qualified Plan Consultants LLC, a national TPA headquartered in Des Moines, Iowa, TPAs and recordkeepers both provide similar administration services, especially those pertaining to plan documents and nondiscrimination testing. “Pure TPAs, however, … can bring an extra value-added touch to the plan sponsor,” he says. “We’re a name and a face, an individual you can talk to about your plan and your thoughts on employee benefits administration more broadly.”
Unlike a recordkeeper, which primarily derives revenues from the retirement plan platform itself, Stewart says, a “pure TPA” derives all of its revenue from consulting work relating to plan design and administration.
Patrick Shelton, managing partner for the TPA firm Benefit Plans Plus in St. Louis and president of the National Institute of Pension Administrators (NIPA), an advocacy group for the TPA industry, generally agrees with the assessment.
“I’ll preface my comments by saying TPAs traditionally are centered in the micro- and small-plan market, but fundamentally for most plan sponsors, the value of a TPA will be found in supplementing their HR [human resource] departments—particularly [with everything concerning] the design and implementation of benefits,” Shelton says. “Typically, as you know, small and even midsized businesses have some tough decisions to make when building out their human resources capabilities, and so what we can do as a TPA is offer very affordable support that can take away much of the pressure of designing and running benefits plan packages.”
Both Shelton and Stewart explain that their firms can go deeper than most recordkeepers when it comes to plan design.
And whereas a recordkeeper could theoretically feel a sense of conflict when a plan sponsor wants to make more radical changes to its plan, which could call into question the fit between said recordkeeper and said plan sponsor, this is where the TPA can really step up and quarterback a potentially uncomfortable process.
“So, like some of the recordkeepers, we handle all the regulatory filings and government compliance, and we really put process safeguards in place to make sure the plan remains compliant over time,” Stewart says. “But we are also capable of going deeper and working with the plan sponsor objectively, potentially enacting deep reforms to the plan that another provider might be uncomfortable with, given its own revenue interests.”
Both experts highlight this point as one reason why the services of TPAs seem to be finding a broader clientele.
“More and more, we see TPA firms moving upmarket and being asked to work alongside recordkeepers and advisers to some larger plans than would traditionally have sought out the services of a TPA,” Shelton says. “In these cases, we can complement the work of the advisers and the recordkeepers from an objective point of view. TPAs are in a good position to do this because of our access to data, our deep analytical capabilities, and our ability to keep both the needs of the employees and the employer in mind.”
Shelton adds, “It used to be that, at $10 million and up, your plan just didn’t work with a TPA anymore because you could probably do it all in-house.” That thinking has diminished alongside the increasing complexity of running a compliant retirement plan, he says, and now some recordkeepers actually encourage more clients to use TPAs—regardless of the size of the plan—because it can be more cost-effective. “There will be a lot of innovation in this area coming up. Unbundling retirement plan services, in general, seems to be the way forward, at least for some segments of the market.”
This incentive to partner closely with one another so each can deliver services accurately and seamlessly in support of shared plan sponsor clients is borne out by the fact that more than 70% of TPA firms responding to the first PLANSPONSOR Third-Party Administrator Survey, this year, have no affiliated recordkeeping platform, needing instead to place business with strategic partners’ platforms.
Related to all of this, what has traditionally been an important consideration for plan sponsors is whether a given TPA is “producing” or “nonproducing” and whether it offers recordkeeping services.
As the name suggests, a producing TPA serves as both the third-party administrator for the plan and, in effect, the plan’s investment adviser. A nonproducing TPA, on the other hand, is not involved in the sale of investment products and performs none of the functions that a financial adviser or investment consultant would typically perform. Among respondents to the PLANSPONSOR TPA Survey, nearly 74% of firms identified themselves as “nonproducing,” while 23% indicated that they can use either model, depending on a client’s needs. Just about 3% said they were purely producing TPAs.
A Changing Role for TPAs
Steven Miyao, president of the financial research and consulting firm DST kasina in New York City, says recent conversations he has had with TPAs show they are “more optimistic than not about the way the Department of Labor [DOL]’s strengthened fiduciary regulations could reshape fundamental aspects of the way their services are weighed and then ultimately purchased and implemented by plan sponsors.”
“For the most part, they feel that the role of TPAs will likely be highlighted and strengthened by the fiduciary rulemaking,” he observes. He thinks nonproducing TPAs in particular will benefit, as they may be able to win some business from those recordkeeping or advisory firms that have not embraced flat-fee work but have favored business models based on brokerage commissions.
“While the fiduciary rule adds fuel to the fire, this is actually a trend that has been developing for a decade or longer,” Miyao says. The argumentation is somewhat complicated, but the basic idea is that TPAs—especially those embracing the nonproducing TPA model and relying purely on agnostic administrative consulting for their revenues—are not in a position where they have to favor one brand of investments or one proprietary platform. Instead, they can happily base their business on collecting flat fees based on specific projects or ongoing services, “meaning their revenue can be completely unbundled from the investment menu, in a way that is clearly viewed as less conflicted than commission-based sales, by the Department of Labor and other regulators.”
One can start to see how the TPAs may actually feel a tailwind in the tougher fiduciary environment, Miyao speculates.
What the Future Could Hold
Both Stewart and Shelton seem to be in line with that idea. “There has definitely been a shift away from just thinking about TPAs as producing or nonproducing,” Shelton says. “Today, the delineation falls more along the lines that you’re either a producing TPA selling investments and making commissions, or you’re a TPA that relies on your own proprietary recordkeeping platform and collects asset-based fees, or you’re a pure administration-only shop. The different models will all work better or worse depending on a plan sponsor’s own outlook and preferences for its plan.
“In our case, we are a nonproducing, non-recordkeeping TPA. We get paid for administrative services only. That’s the beginning and end of our compensation model,” Shelton says. “There is room for all the approaches, I think, but I will say that if you’re going to be a producing TPA, you should be primarily focused on being an investment adviser, and leave the recordkeeping and administration to be secondary.”
Stewart agrees, speaking from the perspective of another administration-only shop. “This frees us up to be wholly focused on technical expertise and to maximize our value over the long term. It allows us to work effectively with any number of alliance partners on the recordkeeping and investment side in a truly objective manner.”
This is perhaps a distinguishing characteristic of a TPA among many other types of providers in the retirement planning industry. “The new fiduciary rule is going to drive a more holistic benchmarking environment, covering everything from the administration, investment costs, plan audit costs, legal fees, etc.,” Stewart concludes. “When you get to the TPA component, it’s usually the easiest part to figure out. We’re able to be very clear and analytical about what our fees are, and we’re very skilled at the benchmarking work that has become absolutely critical for all plan sponsors.”