By: David I Gensler, MSPA, MAAA, EA
When I was younger (much, much younger) Bud Lite ran a series of commercials where quasi- celebrities (most of them were retired athletes) argued back and forth about whether they drank Bud Lite because it “tasted great” or because it had less calories and thus was “less filling” (they had not yet discovered that carbs were bad for you – I told you; this was many, many years ago).
Anyway, this same argument now exists in the 401(k) world in a slightly different form. Which is better – Bundled or Unbundled?
Bundled providers combine recordkeeping services and Third Party Administrative (TPA) services so that their clients experience “one stop shopping.” You use their plan document, you separately sign up with them for their TPA services, etc. The unbundled approach simply means that the recordkeeping provider is independent from the TPA; they are two completely separate firms.
So which is better? The answer of course is, it depends. (Under full disclosure, I own a TPA firm).
What might attract a client to select a bundler provider? Savings say some; less time, say others. Those favoring the bundled approach assert that it is a more cost effective approach. The plan will pay less to have both components (recordkeeping and TPA services) live in one place.
Furthermore, your HR department, your financial department and the plan participants are calling one source to get their questions answered. That saves time and may be less confusing.
Those favoring the unbundled approach cite the following advantages: Local TPA staffs have broader experience in the full scope of retirement plan administration. A bundled provider often breaks down administrative responsibilities into segments (so there is a 5500 department, a loan and distribution department, etc.). You rarely deal with just one person. You end up with a bit of bureaucracy (oh for that you need to call the loan and distribution department – I am in the discrimination testing department). Also, bundled providers generally experience more turnover and move their folks around more. With an unbundled approach, you are more likely to have one consultant assigned to your account.
The unbundled TPA firm is more likely to make strategic plan design recommendations. Most bundled providers want plans that are more “plain vanilla” because they are more volume oriented. The more standardized the plan provisions, the easier it is to process a higher volume of plans. I recently met with a client and recommended that in 2018 they switch from a matching safe harbor plan to a non-elective 3% safe harbor plan. Given what he and the other partners wanted to accomplish on a going forward basis, this was a much more effective design for him. There have been other instances where we recommended that the client would be far better off using the top 20% Highly Compensated Employee (HCE) definition in their plan.
Would the bundled provider have made those recommendations? I don’t know.
Others feel that there is a higher probability that the unbundled approach will produce more accurate results. Some feel that bundled providers are less likely to verify the accuracy of the data being provided to them. Furthermore, it has been my personal experience that a failed ADP test may get a more creative approach from an unbundled than a bundled provider.
Since the TPA firm is usually much smaller than the recordkeeping provider, the client tends to have a more personal relationship with the consultant assigned to their account.
So which is better? Remember I said that “it depends.” For larger plans, a bundled approach will probably be more cost effective. Since larger plans tend to have more standardized designs, the client is not losing much (or anything) in going with the bundled approach. Fair being fair, I have absolutely recommended to some of our larger clients that we could not add enough value to justify the higher fees that they might pay for the unbundled approach. Some opted to keep both functions separate anyway, citing a comfort level with the more hands on unbundled approach.
For smaller clients, I feel that the unbundled approach is generally a better solution. Smaller clients tend to want the more customized plan design approach and the high touch service approach that bundled providers shy away from.