Bundled or Unbundled 401k Plans?

An unbundled plan structure means the administrator, record keeper, custodian, and money manager of the plan are all separate entities. Some bundled plan providers offer the administration of the plan for “free” and then pack your plan with hidden costs and funds with high fees—whether those funds are performing well or not.

An unbundled approach provides four main benefits:

  1. Use of a 3(38) fiduciary, giving the liability of investment management to a professional money management firm 
  2. The use of asset class funds
  3. Transparency of fees; and
  4. The option to use some fees as business deductions
  5. The flexibility to leave an individual vendor if they are not providing optimal service, without disrupting the entire plan

In recent years, more and more bundled plan administrators have removed themselves as fiduciaries, electing to be a 3(21) fiduciary.  With an unbundled plan you can elect a third party investment management firm acting as a 3(38) fiduciary, this  removes the plan sponsor’s burden and liability in choosing funds for the plan.

Bundled plan providers usually stock 401(k) plans with their own mutual funds, only including outside funds upon request. Some providers may even have limited access to Asset Class funds.

Transparency of fees is not only important to ensure that you aren’t paying too much for your 401(k) plan, but it is also important from a legal standpoint. Recently, several large corporations were sued by plan participants because they didn’t know how much they were paying in fees. With and unbundled plan structure you always know what costs are involved because they are fully disclosed to the plan sponsor.

The option to set up your plan to deduct certain fees as business expenses provides a tax break to your company, but there is another layer to this benefit as well. When other companies add fees to the mutual funds in the plan to pay for your “free” plan administration, that means you are paying more out of the funds you’ve saved for retirement. So paying for administration fees from your business assets provides a business tax deduction and keeps more money in your retirement account.

Flexibility to change individual vendors is an advantage.  Bundled programs are in business to sell investments.  All other plan disciplines, are considered overhead.  Vendors of unbundled programs are dependent upon the successful completion of their discipline for their respective profitability.