The Case for Unbundled 401(k) Plans
What does bundling mean?
Bundled and unbundled retirement plans refer to different types of arrangements for the administration and management of employer-sponsored retirement plans. Here’s an overview of the key differences between the two.
Bundled Retirement Plans:
- Definition: Bundled retirement plans, also known as fully bundled or all-in-one plans, are comprehensive retirement plan solutions provided by a single service provider.
- Service Provider: A bundled plan typically involves a single financial institution or recordkeeper that acts as the plan’s administrator, custodian, trustee, and investment provider.
- Services Provided: The bundled service provider handles most, if not all, aspects of plan administration, including recordkeeping, compliance testing, trust services, investment management, and participant communication.
- Benefits: Bundled plans offer simplicity and convenience as all retirement plan services are consolidated with a single provider. They can be particularly advantageous for smaller employers with limited resources or expertise in retirement plan administration.
Unbundled Retirement Plans:
- Definition: Unbundled retirement plans, also known as standalone or à la carte plans, involve multiple service providers, each specializing in a specific aspect of retirement plan administration.
- Service Providers: An unbundled plan involves separate entities or service providers, such as a thirdparty administrator (TPA), custodian, investment manager, and recordkeeper.
- Services Provided: Each service provider in an unbundled arrangement has a distinct role. For example, a TPA may handle plan design, compliance testing, and participant communication, while a separate custodian may provide trust services, and an investment manager may oversee the plan’s investment options.
- Benefits: Unbundled plans offer flexibility and customization options as employers have the freedom to select and work with different service providers based on their specific needs and preferences. This allows for greater control and potentially more cost-effective solutions by choosing specialized providers for each plan component.
It’s important for employers to carefully evaluate their needs, resources, and preferences when choosing between bundled and unbundled retirement plan options. Consulting with a retirement plan advisor or consultant can help navigate the decision-making process and select the most suitable plan arrangement for the organization.
Why would I use a TPA?
Overall, utilizing a TPA for retirement plan administration can streamline operations, ensure compliance, enhance participant experience, and provide valuable expertise and support for employers. It allows businesses to focus on their core operations while entrusting retirement plan administration to experienced professionals.
Expertise and Compliance
Bundled
Administration and compliance services are ancillary for recordkeepers and investment companies. Typically, they are functioning in a surface level or “box checking” capacity, without proactive plan design and tax planning advice.
Unbundled
TPAs have a single, niche focus on retirement administration and compliance with a high emphasis on proactive plan design and tax consulting. TPAs are also nimbler to assist employers through regulatory changes
Administrative Efficiency
Bundled
Having all retirement services consolidated with a single service provider offers simplicity and convenience for plan management aspects. However, the employer is ultimately carrying the bulk of the administrative workload.
Unbundled
While less convenient to have more than one service provider, employers are usually able to delegate a significantly higher amount of routine administrative plan management tasks to TPAs over bundled providers.
Plan Design Flexibility
Bundled
Bundled plan providers are typically focused on providing all-inclusive retirement services in a scalable manner, which results in basic, cookie-cutter plan design features.
Unbundled
Because TPAs are only concerned with compliance and administration, they are well-poised to facilitate more customized and enhanced plan design features.
Fiduciary Support
Bundled
Recordkeepers and investment companies are typically unwilling to serve in a 3(16) administrative fiduciary capacity, leaving the employer holding the bag for all administrative liabilities.
Unbundled
Many TPAs are willing to accept an appointment as the plan’s 3(16) administrative fiduciary, which results in reduced litigious and regulatory risks for the employer.
Costs
Bundled
Often, the administrative and compliance service fees for bundled providers is more economical than working with a TPA.
Unbundled
While bundled plan administration can tend to be more economical on the surface, TPAs often provide a greater value for the cost by freeing up more of the employer’s time, reducing their liabilities, and my offering strategic tax consulting.
Objectivity
Bundled
Inherent conflicts of interest may be present when bundled providers benefit from certain plan design features. For example, not offering self-directed investment options to ensure more plan assets remain invested on their platform in their funds.
Unbundled
By using a TPA, employers can benefit from an independent and impartial assessment of the plan.
