Engaging vendors and service providers who are competent and able to deliver best-in-class services at a reasonable cost is an important 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 for some plan sponsors. This is particularly true for sponsors of 401(k) plans administered by various providers as part of an unbundled strategy.

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

Large companies with dedicated benefits staff and sizable budgets can afford to hire outside advisers to help deal with the challenges associated with unbundled plans, but for small to mid-size companies these challenges can leave them adrift and overwhelmed.

Common concerns companies have about unbundled programs include:

Cumbersome administration
High investment costs
Inability of highly compensated employees (“HCEs”) to maximize their contributions
Frequent plan processing errors
Poorly conducted compliance testing

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

Keeping it simple and affordable

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

Simplifying plan administration also can result in significant financial impact.

Take the case of a software and IT consulting company that was concerned about the cost of its unbundled plan services for its 401(k) plan. The company had engaged an insurance carrier provider, third party administrator (“TPA”) and a broker – all of whom added to the cost of plan services. In addition, the plan administrator was often caught in the cross-fire between the broker and the TPA.

The employees were paying high investment expenses and the company incurred additional costs related to the disjointed service model.

After a benchmarking and analysis of required services were conducted, including use of a proprietary database, a recommendation was made to move the plan to a mutual fund platform with a customizable 401(k) and 403(b) defined contribution plan program, which ultimately reduced investment costs by over 20 percent. This strategy also included a bundled solution, which saved the company several thousand dollars of additional TPA expenses.

Profit-sharing allocation for highly compensated employees

Many employers have implemented new profit-sharing allocations to allow highly compensated employees (HCEs) to maximize their 401(k) contributions. This is a critical solution given the IRS’ nondiscrimination rules that can result in lower contribution limits and unexpected tax liability for these employees.

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

This can be avoided with a properly designed profit-sharing plan that allows HCEs to maximize their contributions, while providing all plan participants the opportunity to achieve their retirement savings goals.

Eliminating plan processing errors

Sponsors of 401(k) plans administered by multiple providers often complain about persistent plan processing errors and inconsistent compliance testing. If the IRS discovered such errors with the compliance of the plan under audit, the plan could be faced with disqualification, causing major tax consequences to both the employer and employees. The tax costs and penalties could run into the millions of dollars for the employer.

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

In one instance, a plan sponsor had uncovered mistakes made by the provider regarding plan eligibility, and the provider did not offer to help correct the errors. They decided to work with a consultant who had an in-house legal team that could help resolve the mistakes that were made and ensure all plan rules would be followed going forward. A recommendation also was made for a bundled plan which reduced costs by approximately $20,000 per year.

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

Instant Insights /

Key benefits of bundled 401(k) plans: simplicity and affordability

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