A new DOL regulation will ratchet up the scrutiny of bundled 401(k) plan fees. You can help your plan sponsors—and potentially their plan participants—by guiding them through the pros and cons of bundled vs. unbundled services. In the process, you can also deepen your relationship with them.
Bundled services are a single company providing all 401(k) plan services including administration, recordkeeping, custody, investments, and investor education—packaged together as one fee. Traditionally these services have been positioned as one-stop shopping or 401k in a box, offering simplicity, brand names and low costs. It’s been reported that bundled services have around two-thirds of the small plan market.
The reality is bundled services have the potential for conflicts of interest with proprietary funds, soft dollars, and undisclosed fees. This makes it difficult for plan sponsors to fulfill their fiduciary duty in verifying participant costs are reasonable. As a result of these drawbacks, plan participants could suffer and plan fiduciaries might be exposed to unnecessary liability.
An alternative to bundled vendors is to separately contract with different vendors for each service. This unbundled approach typically includes a national trust company, a regional/national third-party administrator (TPA) and an independent financial advisor (FA). In spite of the advantages this model provides, explaining why three versus one service provider is a good thing can be a challenge.
Plan sponsors can fall into a comfort zone with the current vendors and fail to implement proper fiduciary safeguards. They can also be reluctant to services that seem complex when their perception of current services is that they adequate serve their needs. Anything different from a 401k in a box may seem completely unnecessary for some. Even improved fee transparency can work against unbundled services if plan sponsors have never been exposed to service fees. It’s also intuitive to think three vendors must be more expensive than one. Be prepared to help the committee develop meaningful measurements for 401(k) success.
Considering and weighing different retirement plan service options are very similar to how the company manages its regular business. Having multiple vendors competing for your services provides decision makers with valuable information that offer insight and generate cost savings. If vendors do not know how their competition is bidding, they often bid more aggressively. Unbundled vendors tend to get-it in terms of transparency and competitive pricing.
Breaking services down by vendor can also be easier to make changes. Plan sponsors do not like feeling trapped in a miserable services relationship but it happens frequently. Vendors will try to manipulate the relationship to protect them from being an expendable commodity. Often plan sponsors feel they aren’t reaching the levels of stewardship they would like to attain but the process of going through a request for proposal (RFP) process can be overwhelming. Plan sponsors are often unfamiliar with how to evaluate vendors or ascertain the true cost of services that have had little disclosure in the past.
The role of the independent FA role with 401(k) services is gaining in importance. Even the initial conversation of why unbundled services are the choice of many large plans can set in motion a robust fiduciary process. The FA who accepts a fiduciary role provides critical oversight benefits. FAs can enhance the fiduciary infrastructure of the plan and provide fiduciary assessments as well as ongoing education for the investment committee. If a plan sponsor needs assistance in selecting a new service provider, FAs often quarterback the request for proposal (RFP) process. When independent fiduciaries are brought on to assist the plan sponsor with a bundled service in place, it’s amazing how quickly vendors offer to reduce their fees.
With the new fee and fiduciary disclosures expect plan independent FA services to be in higher demand. The flexibility, competitive pricing, and commoditization of vendor services allow fiduciaries to have the control needed to manage the plan more effectively. Once the plan sponsor chooses this method they would be hard pressed to ever go back to a bundled service. Having unbundled services from a fiduciary perspective is a lot of fun as well as effective.
Bundled solutions may be hurting your clients in providing employees a chance of a financially sound retirement. In the dawn of the fiduciary standard, FAs should be wary of the 401(k) in a box and have a back-up plan if you have clients using this model. Otherwise you could open yourself to unnecessary liability or lost business. Unbundled services may be a better answer and give your clients better stewardship.
Unbundled won’t always win. Your inquiry may push down fees and inspire
more favorable terms from your bundled provider. But you can’t know the outcome unless you try it first.
But just like a bundled service, the same mistakes can occur in an unbundled service. However the pick-up in effectiveness, transparency outweigh the service risks by far.
