With most Americans concerned that they won’t be able to retire on time, or perhaps worse, will outlive their retirement income, it’s time for business owners to get serious about employee-sponsored retirement plans. These plans are a primary money stream for individuals in their retirement years, making it absolutely essential that they’re designed to benefit the employee, are aligned with company goals, and managed with great care.
In 2015, Alliance Bernstein found that 33% of plan sponsors (AKA the business owner) did not know they were fiduciaries. Further, in light of recent settlements and a favorable Supreme Court ruling, employees have been filing class action lawsuits against employers centered on excessive fees, poor plan design, and alleged conflicts of interest.
This has put plan sponsors on notice that as fiduciaries, employers are legally obligated to prudently select and monitor all of their plan’s service providers and components. With the increasing level of scrutiny surrounding retirement plans, it’s a good time to consider the advantages of “unbundling” your organization’s retirement plan.
Bundled Vs. Unbundled
Every retirement plan consists of four components – an investment advisor, a plan administrator, a record-keeper, and a custodian.
Standard: “Bundled” plans offer plan sponsors a one size fits all, one-stop shop where a single company provides most of the plan services. This bundled structure often hides layers of excess fees combined with a typically subpar level of support for employees.
Advisor-Guided: “Unbundled” plans separate the four main components of a retirement plan. This creates an opportunity for business owners to select a specialized company for each role. Typically, the investment advisory firm coordinates and leads the team of providers to deliver a seamless plan focused on driving down costs while providing better service and better choices.
Unlock Five Advantages of Advisor-Guided Retirement Plans
Let’s look at some of the advantages that would come with unbundling your organization’s retirement plan.
1. Reduce expenses with fee transparency
Bundled structures have historically appeared attractive to plan sponsors because they appear to offer “free” administration services, which are lumped in with the record-keeping fee. But in reality, additional layers of fees and potential kickbacks are hidden within the fund expense category, which often is not shown on the statements.
Unbundled plans, on the other hand, provide disclosures of all fees, including record-keeping, investment, and administrative. Unbundled plan providers focus on driving down costs for plan sponsors. A side-by-side comparison of total fees within a bundled plan and unbundled plan would show the true savings a reduced fee structure would have for both employees and employers.
2. Gain access to better investment choices
Bundled plan providers typically have their own mutual funds. By keeping all the services in-house, the plan provider is motivated to funnel participants into their own funds, thus boosting their assets under management and earning additional compensation. These “in-house” mutual funds may also have above average expense ratios that are deducted prior to reporting performance.
In contrast, most unbundled plans have no allegiances and an open architecture, which ensures plan sponsors access to a broader universe of funds. Unbundled structures also utilize a dedicated investment advisory firm, which often has preferential access to lower cost mutual funds.
3. Receive dedicated service from local, friendly, and knowledgeable advisors.
Unbundled plans give access to a well-rounded team of investment advisors who provide regular educational meetings and on-demand assistance for employees. This often results in higher plan enrollment and more satisfied employees. The advisory firm will often develop easy-to-use investment models that employees can choose based on their goals, objectives, and risk tolerances. Participants in the plan can be confident that a regularly screened and monitored universe of investment possibilities delivers better options for them.
4. Customize your plan’s design.
Bundled plans are one-size fits all. These out-of-the-box solutions rarely offer customization opportunities. Unbundled solutions, on the other hand, offer the flexibility to create a plan that is most advantageous for both business owners and employees, and aligns with the company’s goals and objectives.
5. Eliminate administrative mistakes and uncover potential shortfalls
In an unbundled structure the plan administrator is referred to as a third party administrator (TPA). TPA firms are staffed by industry experts who normally have more experience and knowledge than the staff of a bundled provider. During the transition of plans, TPAs often find basic mistakes that should have been avoided, and could potentially have put the plan at risk for penalties and lawsuits.
The TPA runs many day-to-day aspects of your retirement plan including: amending and restating plan documents; preparing employer and employee benefit statements; assisting in processing all types of distributions from the plan; preparing loan paperwork for plan participants; testing the plan each year to gauge its compliance with IRS non-discrimination requirements as well as plan and participant contribution limits; allocating employer contributions and forfeitures; calculating participant vested percentages; and preparing annual returns and reports required by IRS, DOL and other government agencies.
Need Help With Your Company’s Retirement Plan?
GGM’s Advisor-Guided Retirement Plan will give you and your employees access to specialized expertise and help drive down the cost of your plan. We have done the due diligence and assembled a team of experts to manage your plan.