Bundled 401(k) Plans
By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
A bundled 401(k) is a one-stop-shopping approach. Bundled plans get recordkeeping and administration services from one provider. Unbundled plans use third party administrators (TPAs) that are separate from the recordkeeper. Each approach has advantages and disadvantages.
What Does Bundled Mean?
Bundled means that several of your plan’s services are wrapped together in a package. You choose one service provider who handles plan operations and investments. You only write one check (every year or quarter) to pay for bundled 401(k) plans.
In contrast, unbundled plans use multiple service providers. Your recordkeeper only performs basic recordkeeping services (and may offer an investment platform). For administration, you hire a third party administrator (TPA). These parties share information with each other to keep everything straight in your plan, but they are separate entities.
Advantages of Bundled Plans
Bundled plans are easier for employers who do not want to work with multiple service providers. If you need something done, you don’t have to figure out who to call -- there’s only one option. There are fewer choices to make and you only have to deal with the forms for one company.
In addition, bundled plans may be less expensive for employers. There’s no need to write a check to a TPA. However, somebody has to pay for administration somehow. In bundled 401(k) plans, asset based fees (deducted from employees’ accounts) may cover the bulk of recordkeeping and administration costs, but these costs are not always easy to understand.
In bundled 401(k) plans, plan participants (employees who save and invest in the plan) often pay for plan operations. This results in higher investment expenses. However, if employers are unable to afford a 401(k) plan and would otherwise not offer one, employees may still come out ahead.
Disadvantages of Bundled Plans
A main disadvantage of bundled plans is flexibility. Bundled 401(k) providers may not be able to design and customize a plan to the same degree that a TPA can. The plan documents are often "check the box" forms with fairly basic options. TPAs may use similar documents, but they can generally accommodate more complexity and they’re willing to do the work required. For example, TPAs are more likely to offer New Comparability plans with creative class definitions.
Costs can also be confusing in bundled plans. Because of revenue sharing arrangements with investments offered on bundled platforms, it’s not always clear how much bundled providers earn. Fee disclosure regulations are helping, but fees are not as cut-and-dry as most TPA arrangements ($1500/year plus $25/participant, for example).
TPAs sometimes offer more personalized service -- especially local TPAs who will visit with small businesses face-to-face. Some employers prefer to work with and get acquainted with a small group instead of a large, national bundled provider. This allows TPAs to more proactively detect problems and opportunities.
Does One Cost More than the Other?
When you consider the costs of a 401(k) plan, bundled and unbundled plans should cost the same because the services delivered are more or less the same. Fees may come from different sources (employee investments vs. employer benefit accounts), but the fee levels should be comparable.
In fact, it’s not uncommon to find significant price differences. It’s important to compare the "all-in" costs -- including recordkeeping, administration, and investment expenses -- when deciding whether to go with a bundled or unbundled plan.
As you compare costs, consider who pays the fees -- the employees (or participants) in the plan, or the employer.
Which is Better?
Which is best -- a bundled or an unbundled 401(k) plan? Ultimately it depends on the employer’s needs. Bundled providers may be more than adequate for basic plans where simplicity is a priority. For more customization and flexibility, a local TPA is the best option. The best option becomes apparent only after evaluating employer needs and provider costs.