Each 401(k) plan requires three types of services: investment services, recordkeeping services, and administrative services. An investment advisor typically provides investment services such as selecting funds for the plan, educating participants on choosing their funds, as well as fiduciary responsibilities like monitoring the investment options. Recordkeeping services keep track of each individual account within the plan at the participant level as well as the source and tax treatment of each contribution. They also provide loan administration, payouts, and execute transfers between funds.
Administrative service providers design the plan, create plan documents, and oversee ERISA compliance testing. The work of the administrator is critical during the design of the plan, but also continues on a consultative basis to provide ongoing plan support.
In an “unbundled” plan, the administrative services are performed by an expert third party administration firm. In a “bundled” plan, the recordkeeping and administration services are provided by the same entity.
While bundled plans may seem simpler, using a qualified third party administrator offers various advantages when compared with a bundled plan provider:
Transparent Fees. With bundled services, it may be difficult to determine the real cost for administrative services, since they are reported together with the recordkeeping costs. Unbundled plans provide greater transparency of all fees, including recordkeeping, investment, and administrative.
Comparable Costs. Often, bundled plan providers quote the administrative services at a lower rate to appear more attractive. In reality, unbundled plans tend to be only marginally more expensive that bundled plans. Administrative work is important for the success and compliance of the plan and involves real costs. Bundled plan providers offer bundled services in order to cut costs on the administration services and enjoy higher profits on the overall plan. Using an expert TPA may increase the cost of the overall plan slightly, but will provide higher service and avoid expensive penalties and fees for potential non-compliance.
Resources, Service, and Expertise. With an unbundled plan, sponsors and participants often have access to greater experience and expertise than with a bundled plan. Established TPA firms typically employ experts with more years of experience and relevant education than the staff of a bundled provider. The quality of service offered may be higher since TPAs usually involve smaller groups who have greater interest in each plan, because they work on fewer plans.
Greater Plan Flexibility. TPAs are specialists with extensive expertise on ERISA requirements that can customize each plan to the needs of the plan sponsor. This allows them to provide sophisticated plan design that can overcome more challenges for business owners. Unbundled plans may provide for non-401(k) features such as profit sharing or defined benefit options. The increased flexibility may result in higher retirement savings, benefiting the employer and employees alike.
Avoiding Mistakes. Often, when experienced TPAs take over bundled plans, they encounter basic mistakes that should have been avoided and may have put the plan at risk for penalties. Bundled providers are not usually responsible for any errors in the plans they create. Working with a qualified administrator to create a plan may reduce these errors.
Investment Diversification. Unbundled plans allow for more diverse investment options that may provide greater diversification to participants. They also provide greater ease of changing investment options if necessary. Additionally, access to more investment advice providers may be possible with an unbundled plan.
Reduced Fiduciary Liability. An unbundled plan allows for use of a 3(38) fiduciary, transferring the liability of investment management to a professional advisory firm instead of the plan sponsor. Even if a 3(38) fiduciary is not used, unbundled plans may help meet fiduciary obligations. Because unbundled plans offer more available investment options from more mutual fund companies, the fiduciary responsibility of the plan sponsor may be better satisfied with unbundled plan.
Checks and Balances. One important disadvantage of a bundled plan is the inability to simply change the provider of administrative services, if service or expertise is lacking. This would also require changing the provider of the entire plan. Because TPAs can be replaced without a change to the plan provider, they are incentivized to provide a higher level of service.
Choosing a bundled vs. unbundled plan is a lot like shopping for a new suit. In some cases, an off-the-rack suit may be adequate, but for an important event, a tailored or custom made suit is desireable. A bundled plan may be appropriate for a very simple, straightforward start-up plan, but for plans with any level of complexity or for a larger plan, a third party administrator is a valuable investment towards the best outcome.