Bundled 401(k)s May Be Ripping Off Your Clients
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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.
