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Fulton Bank
Fulton Bank

Retirement Plans: Pros and Cons of Bundled vs. Unbundled Services

The pros and cons of retirement service arrangements have been strongly debated in the industry for decades.  But few of these debates focus on the idea of what it means when a named plan fiduciary is providing non-fiduciary functions. And more importantly, what are the implications for a client. In an environment where firms are purposely pushing the liability of their client’s compliance onto the client─we felt it was time to share our perspective.

There are three primary categories of services that are provided to retirement plans: fiduciary services, and record keeping services and third-party administration (TPA) services. 

  • Fiduciary services include investment advisory services and trustee services.
  • Record keepers process contributions and distributions. They produce participant statements and typically provide the plan’s website.
  • Third party administrators provide plan testing services, plan documents, and 5500 preparation. They also consult on plan design.

In addition, there are two primary service models: bundled and unbundled. In a bundled model the three primary service categories are consolidated with a single provider. With an unbundled model, the service categories are typically provided by three separate providers.

Retirement Plan Service Models

Unbundled Service Model

This is generally the structure presented by investment advisors and is typically the only one they have to offer.

The investment advisor puts together the service team, recommending both the record keeper and the TPA.  The strongest advantage with this service structure is that it’s modular. Poor performing providers can be removed and replaced. But in practice, this rarely happens.

It’s important to understand the compensation arrangements investment advisors may have with providers, often involve revenue sharing and can create conflicts of interest. These are payments to the providers by the mutual funds based on fees the funds charged to their shareholders, or plan participants.  

There are compelling reasons against this structure.

  • The plan sponsor will need to work with three separate entities, as opposed to one.  And each provider has very little influence over how the other providers perform leaving the client to manage individual providers.
  • The second is more subtle but is very important. It has to do with fiduciary responsibility and liability.

Record keeping and TPA services are not fiduciary services by nature. They’re administrative. The providers are highly motivated to make sure their services don’t cross the fiduciary line. A review of their service agreements will likely uncover language devoted to this issue. As such, they are motivated to process data and information provided by plan sponsors without regard to accuracy, compliance with plan terms, and related laws and regulations. As a result, the plan sponsor needs to be the expert.

Here’s an example to illustrate this issue. Many plans exclude certain forms of compensation, such as bonuses. This kind of exclusion needs to be tested for non-discrimination. If the test fails, the other non-discrimination tests need to be adjusted to address this failure, otherwise those tests aren’t valid. Failure to properly test can result in plan disqualification.

Many providers do not run the compensation test, and if they don’t, they won’t mention it. Where does that leave the plan sponsor?  Whose responsibility is it to know that the test needs to be run?  The failure to run the test poses no threat to the providers. It only threatens the plan sponsor, the plan, and the participants.

In this arrangement, if there is a fiduciary provider, it’s the investment advisor.  However, their fiduciary responsibility is limited to investment advice. And they generally have the least amount of retirement plan compliance expertise.

With the unbundled arrangement, the Plan Sponsor should have extensive conversations with the TPA about ERISA (The Employee Retirement Income Security Act)compliance and plan design to ensure the plan is being tested properly and that the plan’s operations and data are consistent with plan design.

Bundled Service Model

The pros and cons of bundled arrangements are the opposite of the modular approach. All three major service categories are provided by the same provider.  The plan sponsor might be happy with the investment advisory services, but not be happy with the record keeping services. There is rarely a way to unbundle this arrangement.

The obvious benefit to this arrangement is that the plan sponsor has a single provider to deal with for every aspect of the plan. There is often a primary relationship manager with oversight responsibilities for all services provided.  This greatly simplifies communication with the provider.  From an operational standpoint, this may be the biggest advantage.

In addition, there are even more  valuable benefits with respect to the fiduciary/non-fiduciary issue.  As the bundled provider wears two fiduciary hats, fiduciary investment advisor and trustee, it’s impossible to argue that they are not a fiduciary while performing non-fiduciary duties.  If a plan fiduciary has knowledge that the record keeping services or TPA services could threaten the welfare of the plan and its participants, that fiduciary has an obligation to act.

It is with this structure, and only this structure, that those who provide the fiduciary services have direct oversight of non-fiduciary functions.  There’s a close link between plan design and record keeping and testing services. There’s an ongoing dialogue between the relationship managers, who represent fiduciary services, and the record keepers. The fiduciary side has meaningful input into the non-fiduciary services.  For example, this means that if there are compensation exclusions that need to be tested, the fiduciary side, in accordance with the best interests of all parties, can ensure that the record keeping is set up properly and compensation is tested.

Conclusion

While there are pros and cons for both types of plan service models,  when selecting an unbundled model, plan sponsors should approach it with a clear understanding of the compliance challenges presented by the plan’s design and how the service providers will handle those challenges. With the bundled arrangement, plan sponsors will have a fiduciary partner involved in all aspects of the plan, but will need to accept the services provided and that they can rarely be unbundled.

In the end, plan sponsors need to be completely confident in the integrity and expertise of their service providers, as well as their commitment to doing what’s right for all parties involved. Otherwise, the potential problems are too significant to be acceptable.

Our perspective

We strive to advocate and protect our customers on every level of their retirement plan. Unbundled providers may not have responsibility to protect your interests at all levels so we urge you to take a closer look at your service model and learn who is responsible for plan compliance. This one step can help you avoid long-term problems 

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The Author

Jim Bush

Jim has over 35 years of experience providing retirement plan services in trust banking and the brokerage industry. He has extensive experience in ERISA and trust compliance, previously working as a trust compliance officer and trust employee benefits compliance officer. Jim graduated from the University of Michigan, Ann Arbor and holds the designations of Qualified Pension Administrator (QPA) and Certified Pension Consultant (CPC) from the American Society of Pension Professionals and Actuaries (ASPPA).