Proposal Pricing

Understanding Pricing Structures in Retirement Plans

  • Different Pricing Types

    • Minimum Revenue Requirement

    • Description: A percentage charged on the assets managed in the retirement plan.

    • Expressed in basis points (bps).

    • Historical Context: Initially, pricing wasn’t typically expressed in this way; now, it's standard in RFPs (Requests for Proposals).

    • Annual Per Account Fee

    • Also known as a per head fee.

    • Defined as a flat dollar fee charged to each account regardless of the account's balance or performance.

    • Importance of terminology: Must refer to it as a per account fee rather than a per participant fee due to one participant possibly having multiple accounts.

    • Ancillary Fees

    • Non-record keeping fees (e.g., loans, QDRO services).

    • Charged only to participants who elect to utilize these specific services.

  • Minimum Revenue Requirement Detailed

    • Calculation Example: If a plan has $100,000,000 in assets and the minimum revenue requirement is 10 basis points, then the fee charged is:
      ext{Fee} = 10 ext{bps} = rac{10}{10000} imes 100,000,000 = 10,000, resulting in a $10,000 fee.
    • Discussion of Pricing Trends:
      • Fee compression observed; prices have decreased over the years (e.g., bids now going out for 2 basis points).
      • Comparison with consultants who charge significantly higher fees for their services.
      • Outcomes of changes in the assets managed (the more successful the plan, the higher the revenue).
    • Ethical Considerations: All earnings sourced from helping participants save for retirement, aligning company success with participant success.

  • Impact of Market Conditions

    • Revenue is affected by market fluctuations; downturns lead to reduced assets and, consequently, decreased revenue.

  • Annual Per Account Fee Specifics

    • Definition: A flat fee (e.g., $10 per account) charged annually.
    • Revenue Generation: Total revenue relies on the number of participants, not on asset size.
    • Consistency: Unlike minimum revenue requirements, fees remain flat regardless of the investment performance.
    • Fairness: With a per account fee, all participants pay the same amount, removing the inconsistencies seen in percentage-based fees.

  • Rebate Mechanisms

    • Any revenue generated above the minimum revenue requirement is returned to the plan
    • Historical Context: Money previously went back to plan sponsors; modern approach favors direct rebates to participant accounts—considered more ethical.

  • Clarifying Fee Structures in RFPs

    • RFPs typically require detailed breakdowns of fees without ambiguity.
    • Confusion often occurs when terms like "participant" versus "account" are misused; always specify account fees to include multi-account participants.

  • Basis Points Explained

    • Definition: A basis point equals 1/100th of a percent, or 0.01%.
    • Conversion examples include:
    • 1 basis point = 0.01%
    • 100 basis points = 1%
    • 50 basis points = 0.5%
    • Importance of Precision: Errors in decimal placement can lead to serious financial implications in pricing communications (e.g., misrepresenting 8 bps as 80 bps).

  • Risks and Precautions for Proposals

    • Ensure accurate pricing presentations by double-checking spreadsheet inputs.
    • Fee Benchmarking Activities: Sometimes mistaken for RFPs but are typically internal assessments comparing pricing across different firms.
    • Importance of proactive communications with Finance to avoid delays and ensure timely responses to RFP queries.

  • Completing Pricing Write-Ups

    • After receiving approved pricing from Finance, prepare detailed pricing analysis addressing the demographic information, revenue assumptions, and specified services included in bids.
    • Include unique elements per proposal, referencing other scenarios or conditions (e.g., no surrender charges).
    • Clear communication on whether prices represent basis points or per account fees is essential, especially in multi-faceted proposals involving proprietary funds.

  • Additional Considerations for Proposal Elements

    • Detailed requirements for contexts where proprietary funds are included, such as providing fund fact sheets.
    • Highlight the importance of providing complete information in the write-up to avoid confusing or misleading stakeholders regarding costs.

  • Best Practices in Communication and Submission

    • Maintain ongoing communication with the finance team for pricing needs and verifications well ahead of deadlines.
    • Create a reliable feedback loop where all parts of the proposal are connected and considerations shared with all involved parties, especially if documentation changes occur during the proposal process.