How TPAs Can Compete With The Payroll Provider TPAs.

When people in the retirement industry ask me about my National ERISA practice, one question is whether I do any third party administration (TPA) work? When asked, my line is always that I don't "because I stick to what I know." Unfortunately, payroll providers don't follow that line, as they are some of the largest TPAs of retirement plans. If you're a TPA, you're often butting heads with these payroll providers and it's frustrating because plan sponsors think there is some value in using a payroll provider as a TPA, but you know the truth. So this article is how TPAs can compete against payroll provider TPAs.

The problem with giving away free services.

By giving free services to prospective and current clients, you have devalued your services.

In my previous life (long story), I had a brother in law.  Yes, one of those. Despite similar interests, we were never friendly mainly because he had the personality approach that he didn't care for anyone else. He wasn't shy with his relatives; he just didn't care for most of mine. When he was dating my sister, I had tax preparation service where I drafted income tax returns for a flat fee of $150 (it wasn't very successful).

My sister wanted to use my tax software to complete my brother in law's (he was the boyfriend at the time) taxes. I said that she could prepare the return as self prepared, but there was no way that I would sign the tax return. I felt the fact that he could use my tax software for free was enough; I didn't have to sign it for it to be filed.

My point of refusing to sign the return was unpopular, but felt that it had to be taken. My view is that my time and work is valuable and if you give you something for free, it really has no value to the one receiving that free service because they feel that it's not worth anything if they get it for free. Free services is not the same as getting a free IPad for signing up with a cable provider because people can assign a value to an IPad and have no idea the value of a service.

So when I hear plan providers giving away free services such as a free investment lineup review, I have a lot of fear that these providers are giving away something of value to plan sponsors who don't think it has any value. A financial advisor giving away a fiduciary analysis to a potential client plan sponsor probably finds a lot of time that they gave away something for free when that plan sponsor retains their current advisor.

Believe me, I know. As you know, I do a plan review called the Retirement Plan Tune-Up for $750. While I think the price can't be beat for the level of review, I have not made as many of these reviews as I think the markets warrants it. A year or so ago, I was contacted by a Northeast registered investment advisor who suggested we could team up on these reviews to his current or prospective clients. He asked if I could do a Plan Tune-Up for a prospective client with this first review being on the house. I did it for free and it's been about a year and a month since I have heard from him. I gave away something of value for free and got the short end of the stick. Needless to say, that was the first and last of the free Retirement Plan Tune-Ups.

So my two cents is that any service you're interested in giving it away for free, ask for some remuneration even if it's negligible because it at least demonstrates to the plan sponsor that it has some value and therefore, can't be chucked away as yesterday's garbage.

The double edged sword of flat fee billing.

Is it a value or not?

I was traveling back home on the Long Island Railroad and noticed a law firm associate trying to remember what he did for the day, filling out his timesheet. You could see the pain on his face and how he combed through his phone to remember what he did for the day and how many billable hours he worked.

There has to be a better way to bill for a living, but the law firm structure is based on the billable hour to support its bloated overhead even it does more harm to their clients.

When I started my own law practice, my goal was to move away from the billable hour because I thought and still think that clients want to know bottom line how much my work is going to cost them and not have sticker shock when they see my bill at the end of the month. Since I didn't have a large overhead, a flat fee for me was the best place to go especially since my legal work working for third party administrators was a flat fee.

For many plan providers especially financial advisors, remuneration was based on assets. Registered investment advisors would get paid their flat level and the broker would usually resort to the different trails that mutual funds pay.  Is there a better way to be paid?

A lot of advisors are pushing for a flat fee or other alternative arrangements such as a per participant charge.

For the provider offering it, their flat fee must be an accurate assessment of their work with a profit margin or they'll cut their throats. A lot of thinking and math has to go into quantify a flat fee when the advisor has always charged an asset based fee. For the plan sponsors, a flat fee is a great fee to digest and understand, but they have to be wary whether they are actually paying more than the advisor charging that old asset based fee. It can be a double-edged sword for everyone involved if one or more parties aren't careful.

While I charge a flat fee, I'd be hard pressed to find a law firm attorney (not a TPA attorney who has no attorney-client relationship) who charges less (especially by the billable hour), but all plan sponsors have a duty to determine whether my fees are reasonable too. Plan sponsors can't take my word for it, their fiduciary duty depends on them not.

Plan providers should never let a client's anger fester.

Unless you want to get fired and/or sued.

I live in Oceanside, New York, an unincorporated village on the South Shore of Nassau County, Long Island. Hurricane Sandy pummeled Oceanside including my home. I had 5 feet of water in the house and both cars were destroyed.

For some reason, which has never been explained, Oceanside Sanitation did not come back for several weeks to pick up the trash. For some reason that has also never been explained, Oceanside has a Sanitation District separate from the town that it is run like its own little fiefdom.

Garbage was piling up and there were rumors that Sanitation workers were pulled off the street after several of them were accepting bribes from other residents. To this day, I still don't know whether those rumors are true or not. The Town of Hempstead eventually bailed out Oceanside Sanitation by sending their garbage trucks and working with them to hire a debris removal company. Again, there was no explanation why Oceanside Sanitation was missing in action during this time of crisis.

A few weeks back, we had a rarely contested election for one of the Sanitation District commissioner positions. The incumbent, 7 months after Sandy, was offering excuses why Oceanside Sanitation was unable to remove the debris. Instead of accepting some responsibility for the loss of leadership, he pointed to the awards that Oceanside Sanitation received from the school district from the clean up and he claimed that residents impacted by Sandy were unreasonable to expect the District to clear the debris. He then congratulated himself on the job that he did after the Hurricane. Some politicians endorsed the incumbent because he was part of the same political party, but there was no reason as to why he should be re-elected.

I don't think I have been as mad about an election in my life and 1,200 other Oceanside residents were also angry enough to vote and the incumbent was crushed. Does he get our anger now? Probably not, he's just too arrogant. Had he wanted to keep his position, he should have started campaigning after the storm and offer a reason why the District failed us. His problem is that he didn't think we had a right to know until it was too late. Until as recent as the election, the Sanitation District had no website and the website they did set up wouldn't even name the Sanitation Commissioners.

Retirement plan providers can never be arrogant when it comes to the gripes raised by their clients. If clients have an issue with your service, you can't discount because anger festers and boils over into an irreversible cycle that gets you fired. If something goes wrong, you have to offer an explanation why and you just can't come up with an excuse when it's convenient for you. You need to be hands on and nip problems in the bud. Clients have a right to know why something goes wrong and you can't just offer an explanation when it's time for the client to renew their service agreement with you or pay your bill.

For every relationship that went sour in my life, the reason 100% of the time was a lack of communication. Whether it's one side or both sides, the lack of communication festered into an anger that irreparably damaged the relationship. A retirement plan provider can't afford to be arrogant because there are dozens of other competing providers ready to replace you.

Constant communication is one of the great tools that a retirement plan provider can have in preserving their relationship with their clients, so it's key that you are in frequent communication and never take advantage of their business, their trust, and their goodwill. Otherwise, you may be out of a job like the Oceanside Sanitation District Commissioner.