Insurance Products Still Have a Long Way to Go.
Many 401(k) plans are moving away from revenue sharing as sponsors and advisors cite the need for transparency and simplicity. So called ‘clean shares’ have no revenue sharing whatsoever in them and make no payments to recordkeepers or advisors. This is the wave of the future for both large and small plans using straight mutual funds, ETFs or CITs.
Unfortunately, the same cannot be said for unbundled offerings using an insurance company platform and a local Third Party Administrator (TPA). Very often the insurance companies have special arrangements with TPAs whereby revenue is shared (and hopefully disclosed). Many (but not all) TPAs will offset their fees dollar for dollar with any revenue sharing. However, the dollar amount of these payments to the TPA can vary greatly from one insurance company to another depending on the volume of business that TPA has with that carrier. A TPA may receive 5 basis points from one insurance company for a given plan, while receiving 10 basis points from another insurance company for the very same plan.
Even if the TPA offsets their fees with this revenue sharing, there may be more or less revenue available depending on the platform and the TPA. To be fair, many TPAs don’t like this construct either as it makes pricing the plan difficult (if the TPA retains the revenue) or the additional accounting cumbersome (if they offset). And let’s not forget the plan sponsor and participants who are ultimately, albeit circuitously paying this for this revenue sharing. Try explaining this to a plan sponsor much less a participant. And why should a TPA be paid in basis points, when their work has little to do with the assets of the plan??
If you use a TPA, be sure to ask how much revenue sharing that TPA is receiving from the insurance company platform and factor that amount into any fee analysis. Need help with a fee analysis? Call us.
The mutual fund companies and open architecture shops have come a long way in providing unbiased investment products. Remember when there were C shares in retirement plans? The insurance industry however still has a long way to go in creating a completely transparent, unbiased retirement plan arrangement.