tag:blogger.com,1999:blog-5465015914589377788.post502988502069251751..comments2024-02-17T11:07:06.232-05:00Comments on Michael James on Money: PRPP Costs (Redux)Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5465015914589377788.post-71490590488852513952012-08-31T11:38:49.006-04:002012-08-31T11:38:49.006-04:00Unless you're transferring a lot of assets int...Unless you're transferring a lot of assets into the plan or 15 years into it, it seems like anything fee-related will grow linearly for the first decade or so (or slightly faster if total payroll is growing). So after that, look out :)<br /><br />One thing I didn't consider is companies that provide an expensive plan but don't have a big enough kickback to match that gap. That could create a gap in fees that go directly to the manager, but any price difference that isn't returned in some form makes it less competitive. The choice between two providers with equal kickbacks but different fees should be clear unless someone really believes in the managers/marketing on one side.<br /><br />Of course anything going back to employees is good, and anything that is returned to the employer could still benefit employees because it makes it slightly cheaper overall to pay them.<br /><br />As you said a lot of employers probably won't make the right choice. Personally I wouldn't see such a kickback as a large amount unless the assets were into the millions, and even then it would be a small percentage of the ongoing payments unless the plan's been in operation for 15-20 years. I wonder if there will be a provider that restricts choices to index funds...Simply Rich Lifehttp://simplyrichlife.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-80420816323279775322012-08-30T12:42:01.254-04:002012-08-30T12:42:01.254-04:00@Simply Rich Life: I think you're missing the...@Simply Rich Life: I think you're missing the compounding effect of the 0.5%. Your numbers work for the first year, but that 0.5% applies to all savings every year, not just the new savings. So, the kickback the second year is roughly double, then triple the third year, and so on.<br /><br />Another thing to consider is that this kickback arrangement would make the PRPP marketplace competitive based on kickback size rather than participant costs. So, the PRPP administrators would end up charging higher net fees than they would if there were no kickbacks. In effect, the PRPP administrators would be taking extra money from participants and splitting it with the employers. This means that looking at employers plus employees collectively, they are worse off in a scenario that has kickbacks.<br /><br />Overall, I think that kickbacks would be very bad for employees, roughly neutral for employers, and good for PRPP administrators.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-81022783518883298782012-08-30T12:32:34.785-04:002012-08-30T12:32:34.785-04:00One advantage of this is that smaller employers ma...One advantage of this is that smaller employers may get kickbacks but they wouldn't be the same scale of incentive that they would at a large firm.<br /><br />Say a company has 10 employees, each paid $50,000 on average, and they can put in 5% of their salary and have it matched by the company. That means that each year the total plan contributions are up to $50,000 ($25,000 provided by the employer). After 5 years this would add up to $250,000. <br /><br />0.5% of this would amount to an extra $1,250/year ($125/employee) going the employer, growing at $250/year ($25/employee). That's not even enough to make a dent in the employer matching. If there are indeed offerings that have lower fees for the plan members I would go for that to give them the most value (although they might not recognize it).<br /><br />Like everything related to employment it gets calculated into the total cost (which could still help employees when there are kickbacks), but here it seems too small to make a meaningful difference to the cost of hiring.Simply Rich Lifehttp://simplyrichlife.wordpress.com/noreply@blogger.com