By Lorraine Ell

The dramatic loss of value in 401(k) plans has prompted a fresh look at how the plans are managed and how much they cost. With the reduction in traditional pension plans since the Tax Reform Act of 1978, which established the savings plan known as the 401(k), more than half of all workers in for-profit corporations participate in these plans and depend on them to help fund retirement.

It helps to first understand the components of a 401(k). A 401(k) plan requires four components: recordkeeper, trust plan administrator (TPA), trustee, and investment advisor. The record keeper processes transactions with the trust company including transfers and contributions and provides daily reconciliation of trust to plan records and account balance updates. The trust company clears trades and holds and safeguards the plan assets. The TPA produces the initial plan document, cross-tests the contribution calculations, files government documents, and completes any trust reconciliation and compliance testing. The investment advisor designs and implements the retirement investments, trains and enrolls participants, benchmarks the plan’s effectiveness, provides due diligence, and acts as a fiduciary on the account.

Over 80% of existing 401(k) plans are “bundled” meaning all component responsibilities, except in some cases the TPA, are fulfilled by the plan provider, usually an insurance company. The popularity of the “bundled” plan results from the perception that they are simpler and less expensive, but are they? Fees are often buried in the insurance contracts and mutual funds, the most common investment in the plans, have varying charges based on the asset class the fund invests in and whether they are actively managed. Many “bundled” plans offer a special class of funds designed for the bundled provider with additional fees in the pricing. To add to the confusion, many mutual funds charge “revenue sharing” or 12(b)1 fees, which are usually not disclosed and may be paid to the plan provider or taken as commission.

As with any all-in-one service, the potential for conflict of interest and the inevitable drift to mediocrity in “bundled” plans poses unnecessary and, to the participant, unexpected problems. Participants are often directed to an 800 number for not only administrative services but also financial advice. Most “bundled” plans are designed as one-size-fits-all to increase efficiency and reduce costs but leave no ability for customization. The plans offer restricted fund selection and a critical lack of continuing fiduciary oversight as plan participants have limited if any access to an investment expert. If problems arise with one of the components in the bundle, the entire plan needs to be changed.

To counter these problems, the “bundled unbundled” plan or alliance model has become a viable option. As an independent network of professionals, the record keeper, trustee, TPA, and investment advisor work in tandem to deliver a higher level of service that is conflict free, non-proprietary and asset neutral. With an integrated, internet-based platform, “bundled unbundled” plans are structured to provide the same benefits of the “bundled” approach with easy access to information and competitive fee structures. As each distinct component specializes and is expert in their part of the process, plans can be customized to meet the needs of both employers and employees.

Participants have direct access to the record keeper for account balances and administrative services. Enrollment can be done electronically or through in-person meetings with a professional investment advisor, who can also help in selecting an appropriate allocation of the plan’s assets. The personalized service of an investment advisor will help participants make wiser choices in their plans. The fiduciary responsibility is shared. Fees and expenses are fully disclosed, 12(b)1 fees are credited back to the plan, and the funds offered in the plan are the same funds available and priced in the marketplace.

The open architecture of the “bundled unbundled” plan allows participants a wider variety of fund choices, with no conflict of interest in fund selection and no proprietary funds. This ensures complete investment neutrality.

The multiple levels of accountability, full transparency in fee disclosure, and expanded investment selections make the “bundled unbundled” 401(k) plan competitive for companies of any size. It is now time to find a better way to manage 401(k) plans.

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