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Should 401k Plan Sponsors Sell Their Souls for One-Stop-Shopping?

December 06
00:05 2011

We face these decisions each day of our lives in many different ways. You’ve just quenched your car’s empty gas tank, but standing in the heat of the sun urges you to satisfy your own thirst. Rather than drive down the street to the 770432_49641869_carrots_stock_xchng_royalty_free_300grocery market, you decide the convenience of the service station’s cooler far outweighs the higher costs of the ice cold beverages it holds. But price and convenience can go both ways. Low-priced merchandise stores have recently added low-cost groceries to their inventory. In these cases, often the convenience of one-stop-shopping trumps the lesser quality of, in particular, those lower-cost diary and produce items.

Is it a surprise, then, to discover the 401k world mimics this very same retail environment? From banks to insurance companies, from payroll processors to mutual fund families, the appeal of convenience often lures the 401k plan sponsor to these bundled service providers. But are the purported lower fees of bundling real, or are they a figment of some marketing department’s imagination? Worse, do bundled providers act as a fiduciary trap given the very real conflicts-of-interest embedded within them?

Despite a growing consensus, which we’ll reveal in a moment, the debate rages on.

“Bundled service providers can be good for smaller plans. I like the unbundled model for mid-size and larger plans. However, it is the type of bundled service provider that small employers should take the time to choose. There are many good bundled independent TPA/recordkeepers that provide open architecture, fee-transparent services along with robust 3(21) and 3(38) fiduciary services,” says Sarah Simoneaux, a retirement services consultant from the greater New Orleans area and a Past-President of the American Society of Pension Professionals & Actuaries. “I think small and mid-size plan sponsors sometimes go for the ‘name’ providers because they think it is safer, when in fact, it frequently is not,” she adds. “A Cogent study said plan sponsors cared more about service than about ‘name’ in 401k providers. The name just got you in the door.”

Michael Spraul agrees. Spraul, a financial services professional from the Cincinnati Area who spent nearly twenty years working for Fidelity, says “I agree not all bundled service providers are great, [but] employers should work with the format that suits them best. If you go with a bundled platform, you are working with one company. If you un-bundle, you increase administration because you are working with multiple providers. That increase in administration will take time, and that time and expense should not be ignored.”

Indeed, we recognize this last statement as the essential “one-stop-shopping” benefit of bundled service providers. In general, many cite the benefits of bundling to include a single point of contact for resolution of issues; depth and scale to deliver services; and, economies of scale that permit cost effective service delivery.

However, there is less of a consensus on that last point. It’s not clear if bundling offers convenience at a higher cost or at a lower cost with a lower quality product. Many feel the downside of bundling – the possibility for conflicts of interest with investment management objectives – represents a fiduciary trap with far more serious ramifications than saving a few bucks or making one’s life easier.

Craig Freedman, Managing Director at 401k Certified Independent Investment Advisors, LLC in Boca Raton, Florida says, “For some, the bundled product is a timesaver. But, all plan sponsors still have an obligation to the plan to ensure the services to the plan are reasonable and in the best interest of the participants. The problem isn’t that plan sponsors aren’t able to get the same efficiencies at a reasonable cost on an à la carte basis. The problem lies in the ability of bundled plans to hide fees and gouge participants at the fee register.”

Clearly, there’s a growing consensus away from bundled service providers and towards an unbundled environment. “In a study published last year,” says Chuck Miller a consultant in financial services communications from the Chicago Area, “it was found that one of the hallmarks of an ‘ideal’ 401k was an unbundled plan, because it allows plan sponsors to have ‘best of breed’ services.”

We now have more empirical data to support this consensus. Mike Alfred, Co-Founder and CEO of BrightScope, the 401k rating firm located in San Diego, California, tells FiduciaryNews “Large plans are almost always unbundled and typically lower cost due to economies of scale. I don’t think bundling is necessarily ever ‘better’ for anyone other than the service provider. There is a reason why the best mega plans in the country, like IBM and Lockheed Martin, are unbundled.”

But by no means should one assume the benefits of unbundling accrue only to the “best mega plans in the country.” “Technology and investment flexibility now make it possible for small and medium size plans to obtain on an à la carte basis the same efficiencies once only found in a fully bundled product,” says Freedman. “Recordkeepers, administrators, plan advisors and participant level fiduciary advisers can all now come together on an à la carte basis giving a plan sponsor the freedom to pick and choose the best provider for each function and replace only that provider who is not performing adequately, without sacrificing the other areas of service. I don’t believe any one service provider can be all things to all people and do them all well.”

Unlike large plans, however, smaller plans can’t afford to dedicate specific personnel to manage their HR department, let alone coral a herd of 401k service providers. In the end, the temptation of making one’s job easier may be too great for the “theory” of fiduciary liability to overcome. Perhaps Freedman sums it up best when he concludes, “Hopefully plan fiduciaries will recognize that what impacts the plan as a whole also impacts them as a participant and their families as well.”

After all, spoiled milk and rotten vegetables aren’t good no matter how conveniently available and no matter how low the price.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Pensiongeek
    Pensiongeek December 07, 09:18

    A bigger issue is the large range of service levels provided in the industry. The big name bundled providers typically act as record keepers, not full service TPA’s. If the plan sponsor doesn’t mind determining eligibility, calculating contribution amounts and assuming responsibility for making sure the testing is done correctly, the big name providers work well. However, if the plan sponsor isn’t a qualified plan expert, they should consider a full service TPA that takes responsibility for their work. You can tell the difference by looking at the service provider’s contract. Does it say the plan sponsor is responsible for everything? Some of the big name providers will send a testing printout and require the plan sponsor to certify the results are correct. If they are not notified about a problem with testing, it is deemed to be correct and they are not responsible for errors. It’s amazing how many sponsors blindly sign these certifications without having a clue whether the testing is correct or not.

  2. Paul Carmichael
    Paul Carmichael December 12, 08:39

    I have to disagree with Michael Spraul’s comments that working unbundled causes more administration work. If fact, it causes much less administrative work since the TPA is the expert in coding the employees to see who is Key, who is an HCE and utilizing the best test method available. The TPA also completes the 5500 and all required testing along with being an expert to plan for the small business. If a company wants to hire, train and pay an employee for these expertise, then fully bundled might be a good answer.

  3. Scott Ann Setzer
    Scott Ann Setzer December 15, 13:59

    When an unnamed bundled payroll provider’s SAS 70 states “clients are responsible for completing plan discrimination testing reports and IRS Form 5500 compliance, accuracy, and reporting” free just isn’t worth it.

  4. TPApril
    TPApril April 13, 21:59

    Regardless, isn’t the Plan Sponsor/Administrator the one ultimately responsible nonetheless that all compliance is done correctly? While I agree that the work will be of higher quality through a TPA, don’t TPA firms put similar disclaimers on their reporting? After all, the TPA is not responsible to audit the quality of the data provided to them. But the higher quality of their work would seem to me more of an argument to justify the cost, rather than who is taking responsibility.

    Good argument, Paul, that yes, down the road, it probably is less administrative work if a TPA is doing the work now rather than a bundled provider.

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