Engaging vendors and service providers who are competent andable to deliver best-in-class services at a reasonable cost is animportant fiduciary obligation of a 401(k) plan sponsor.

As 401(k) plans become more technical,with many diverse investment options and administration strategies,finding top-notch service at modest expense can be a challenge forsome plan sponsors. This is particularly true for sponsors of401(k) plans administered by various providers as part of anunbundled strategy.

Related: Competition in smaller retirement planmarket heats up

Such plans are often plagued by high costs and cumbersomeprocesses for plan beneficiaries. For example, in an unbundledplan, changing investment options or simply locating a single pointof contact to address concerns can be a complex exercise.

Large companies with dedicated benefits staff and sizablebudgets can afford to hire outside advisers to help deal with thechallenges associated with unbundled plans, but for small tomid-size companies these challenges can leave them adrift andoverwhelmed.

Common concerns companies have about unbundled programsinclude:

• Cumbersome administration

• High investment costs

• Inability of highly compensated employees (“HCEs”) to maximizetheir contributions

• Frequent plan processing errors

• Poorly conducted compliance testing

It is no surprise then that one study found that among planswith fewer than 250 participants, 85 percent rely on a bundledservice provider. To keep 401(k) plans affordable, small tomid-size businesses need to be able to consolidate their services,keep costs low while maintaining a level of superior service totheir participants.

Keeping it simple and affordable

Consolidating retirement plan services with a bundled solutioncan reduce total costs by up to 20 percent a year in certain cases.The potential for cost savings can vary and is dependent on anumber of factors including plan provisions, size and investmentselections.

Simplifying plan administration also can result in significantfinancial impact.

Take the case of a software and IT consulting company that wasconcerned about the cost of its unbundled plan services for its401(k) plan. The company had engaged an insurance carrier provider,third party administrator (“TPA”) and a broker – all of whom addedto the cost of plan services. In addition, the plan administratorwas often caught in the cross-fire between the broker and theTPA.

The employees were paying high investment expenses and thecompany incurred additional costs related to the disjointed servicemodel.

After a benchmarking and analysis of required services wereconducted, including use of a proprietary database, arecommendation was made to move the plan to a mutual fund platformwith a customizable 401(k) and 403(b) defined contribution planprogram, which ultimately reduced investment costs by over 20percent. This strategy also included a bundled solution, whichsaved the company several thousand dollars of additional TPAexpenses.

Profit-sharing allocation for highly compensatedemployees

Many employers have implemented new profit-sharing allocationsto allow highly compensated employees (HCEs) to maximize their401(k) contributions. This is a critical solution given the IRS’nondiscrimination rules that can result in lower contributionlimits and unexpected tax liability for these employees.

Typically, the IRS reviews plans to determine if HCEs aredeferring disproportionately more of their income through 401(k)plans than the rank-and-file employees, and also if the total401(k) contributions of the executives are disproportionatelyhigher than the total 401(k) contributions of the other employees.Failing the non-discrimination test can mean a refund ofcontributions and a potentially large tax bill from Uncle Sam.

This can be avoided with a properly designed profit-sharing planthat allows HCEs to maximize their contributions, while providingall plan participants the opportunity to achieve their retirementsavings goals.

Eliminating plan processing errors

Sponsors of 401(k) plans administered by multiple providersoften complain about persistent plan processing errors andinconsistent compliance testing. If the IRS discovered such errorswith the compliance of the plan under audit, the plan could befaced with disqualification, causing major tax consequences to boththe employer and employees. The tax costs and penalties could runinto the millions of dollars for the employer.

Generally, the IRS will try to avoid disqualification byaddressing the errors through a written closing agreement with theplan administrator or fiduciary, and impose sanctions andpenalties, which can be in the tens-of-thousands of dollars.

In one instance, a plan sponsor had uncovered mistakes made bythe provider regarding plan eligibility, and the provider did notoffer to help correct the errors. They decided to work with aconsultant who had an in-house legal team that could help resolvethe mistakes that were made and ensure all plan rules would befollowed going forward. A recommendation also was made for abundled plan which reduced costs by approximately $20,000 peryear.

The above are a few examples show how plan sponsors can fulfillfiduciary responsibilities through bundled solutions.