Why 401(k) advisers should heed TPA consolidation

Third-party administrators have been in the spotlight following a string of recent acquisitions, and retirement plan advisers should take note.

TPAs, which provide administrative services to defined-contribution plans, have been getting more attention largely because of an aggressive roll-up strategy being executed by the private-equity backed firm Ascensus.

Ascensus TPA Solutions has been on a buying streak, having made five acquisitions in 2017 and eight this year through May — a pace of almost two per month. TPA consolidation has the potential to disrupt advisers’ DC-plan business. Other national firms like United Retirement and Retirement Advantage also have acquired TPAs in past years.

There are three business models for administrative services in defined-contribution plans, such as 401(k)s and 403(b)s:

• A bundled model, in which the plan’s record keeper performs all basic administrative services;

• Unbundled, where the record keeper partners with a local independent TPA that performs compliance and consulting tasks; and

• Open architecture, in which a local TPA performs record keeping, compliance and consulting with an open investment menu.

The unbundled model is most popular among plans with less than $20 million, while bundled services offerings dominate larger plans.

Plan compliance and outsourced administrative fiduciary services (known as 3(16) fiduciary services, after a section of ERISA) are a primary focus for smaller DC plan sponsors concerned about documentation, process and fines.

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In the past, many small business owners used TPAs primarily to help with tax planning through 401(k) plan design. But automatic plan features such as auto-enrollment have changed the equation slightly. While tax planning is still important, today the focus is more on improving employee retirement outcomes through automation. Features like auto-enrollment are seen as a panacea, but are fraught with danger if not properly administered.

Generalist retirement plan advisers — those that don’t specialize in the 401(k) market — are often paired with TPAs by wholesalers at national record-keeping firms, a model started by Nationwide, perfected by John Hancock and used by almost all small-market providers. Generalists rely on local TPAs to set up and service the plan.

About 600 TPAs offer record keeping, and another 4,000 act as compliance-only TPAs. Some of these firms also act as a type of adviser known as “producing TPAs,” which advise on plan investments.

Jerry Bramlett, the newly hired leader of Ascensus’ TPA business, said the company sees a lot of value in making acquisitions.

“TPAs offer a predictable source of revenue which can be enhanced through technology and outsourcing,” he said.

Ascensus is building out a national TPA salesforce that will make it difficult for independent local TPAs to compete, especially as they get more questions about cybersecurity, disaster recovery and privacy policies.

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As their margins continue to erode, it makes sense for plan advisers to outsource compliance and consulting services to TPAs,​ especially as bundled record keepers cut back on providing customized services to smaller plans. But the Ascensus roll-up, along with broader TPA consolidation, could leave thousands of smaller TPAs vulnerable. Not only are advisers and record keepers asking more difficult questions of them — especially about cybersecurity — but fee transparency will continue to accelerate the decline in fees, which is more difficult for smaller TPAs to react to or absorb.

That makes the selection and ongoing monitoring of TPAs — as with record keepers, which are also experiencing consolidation — more important for plan advisers. If something goes awry, it may not be the adviser’s fault but it will most certainly be the adviser’s problem, just like when record keepers sell or exit the retirement-plan business.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ Retirement Plan Adviser newsletter.