When it comes to 401(k) retirement plans, plan services consist of three components:
- Investment Services
- Recordkeeping Services
- Administrative Services
The Bundled v. Unbundled decision is really about the Administrative Services portion of the 401(k) plan.
In a Bundled plan, the financial institution who is providing the Recordkeeping Services is also providing the Administrative Services (i.e., ERISA compliance work). In an Unbundled plan, this service is performed by a local, expert Third Party Administration (TPA) firm.
There are costs associated with whomever performs these services. We will summarize Pros and Cons of each.
A perceived disadvantage of an Unbundled Service is there will be too many parties involved in the process. But in comparing a Bundled v. Unbundled service, the additional technical and service benefits that a TPA can add, often outweighs the additional of another entity. With most bundled providers, a separate department of the financial institution is involved, resulting in a second layer of personnel in the mix. So, in reality there is not much difference between the two types of offerings when it comes to the parties that will be involved with the 401(k) plan.
A second perceived disadvantage of the Unbundled Service is it is significantly more expensive than a Bundled Service due to the additional party in the mix. Whether you select Bundled or Unbundled, the same services must be performed, which requires people and resources. In order to make an accurate comparison, a plan sponsor needs to understand how a Bundled Service is billed.
Often, it may be included in the overall fee (which includes the direct billable fee along with an asset based fee). So, while the direct billable fee of a bundled service might look less expensive, if part of the fee is included as asset based, the cost of investment options may be higher. Either way, it’s important to understand all fees associated with bundled plans.
Generally, the unbundled service is marginally more expensive than a bundled offering, but the benefit v. cost trade-off may offset this difference.
In an unbundled service, the Plan Sponsor and participants in the plan will generally see an advantage of more comprehensive and technically competent services. The professional staff of a TPA tend to have more years of experience along with more technical training than the typical staff of a bundled provider. Most TPA’s are owned by on-site management who have a greater interest in its success than a paid manager in a larger financial institution. In an unbundled environment, if the services of a TPA are not meeting expectations, the Plan Sponsor can replace the TPA without an impact to the overall retirement program. With a bundled service, if any portion of the compliance work or communication is lacking, you will have to replace the whole program – which can be time consuming.
When it comes to communicating with the Plan Sponsor, the bundled provider (financial institution) is often organized around client services representatives who are charged with this task. The actual work and compliance services are completed by back office staff. This can complicate communication issues with the Plan Sponsor if multiple people become involved, and there is a disconnect on who is responsible for an issue.
In contrast, a typical TPA assigns the administrator as both the client services representative and the person actually performing the critical compliance work. This may result in a better communication channel as well as more immediate feedback with questions.
When it comes to plan design, a TPA is generally able to provide more sophisticated plan design and plan documents. Most bundled providers utilize Standardized Prototypes, which may not provide the level of complexity required by some Plan Sponsors.
A TPA is generally more proactive in communicating with Plan Sponsors about changes in the law, and the reality of these changes as it impacts their business environment. A bundled service is good at producing literature about the changes in the law, but this does not always result in communications with the Plan Sponsor about how the changes will impact them.
The bottom line is that the determination of a Bundled v. Unbundled Service will depend on the needs of the Plan Sponsor and the sophistication with plan design. Both approaches provide a solution that might fit the organization’s needs, but it’s important to understand all aspects of the Bundled v. Unbundled comparison (fee transparency, one service provider v. two parties, etc.) when deciding which approach is best for your 401(k) plan.
Fortune Financial has the experience and depth of knowledge to guide you through this process.