By Jeff Chang
When it comes to retirement plan servicing arrangements for most public agencies, there are basically two flavors: bundled and unbundled. It is important for public plan sponsors and plan fiduciaries to understand the differences between these arrangements so they can ensure that their plans and plan participants are being serviced appropriately.
A “bundled” arrangement is where a single entity, such as a large national insurance company (and/or its “affiliates”) provide both plan investment advice and plan recordkeeping services. Investment advice generally consists of advising the plan fiduciaries on which investment options (e.g., mutual funds, annuity contracts, stable value funds, etc.) should be made available as part of the plan’s investment menu. To a lesser extent, plan investment advice may also include providing participants with certain degrees of investment education and limited investment advice based on their particular circumstances. Often, participant-level investment advice is provided on an optional basis and carries its own fee. Plan recordkeeping services generally consist of tracking contributions, earnings and losses, withdrawals, annual limits, vesting, and distributions for all participant accounts. Recordkeepers (either directly or through an affiliate) also provide plan document services, assistance with qualified domestic relations orders, participant loans, hardship distributions, retirement distributions, and the reporting of all such transactions.
Like booking a vacation at an “all-inclusive” resort, the principal advantage of a bundled arrangement is its simplicity and ease of use. You are dealing with what seems to be a single provider and you and your participants are paying a single all-inclusive fee. Remember, as we previously posted, in most cases it is the participants who are bearing the costs of the recordkeeping and investment advice. A valid question is whether they are getting what they are paying for.
By contrast, an unbundled arrangement involves the separation of investment advice services from recordkeeping services. Usually the plan, or the plan sponsor, retains an independent investment adviser or consultant to provide plan investment advice. Because the investment adviser in not affiliated with or beholden to the recordkeeper, you often see investment menus based on an “open architecture” approach – that is, the investment adviser is able to select and offer practically all available mutual fund options, not just what the recordkeeper is willing (or prefers) to offer. This is like shopping at the auto mall rather than at a single dealer. Most investment advisers are paid based on how well the plan’s investments do overall (i.e., a percentage of the plan’s market value) and should not receive commission-type (or 12b-1) compensation that is driven by the placement of particular investments.
There are two advantages of an unbundled arrangement. First, an independent investment adviser and consultant can help plan fiduciaries properly monitor the fees and services of the recordkeeper. Retirement plan administration is complicated, and it often helps to have an independent adviser who will serve as a “check and balance” to the plan’s recordkeeper. Second, many registered investment advisers will now agree to serve as a “3(38)” adviser, as though ERISA applies to the plan.
Once upon a time, it was necessary to go the bundled service route if you had a new plan or a plan with few assets. However, increased service levels and competition in the public sector retirement plan market now make unbundled and open architecture service arrangements viable for plans with as little as $1 to 2 million.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.