Bundled Versus Unbundled: 5 Myths

 As human beings, we’re often motivated to seek simpler solutions to life’s challenges. But sometimes “simpler”… isn’t. 

While there are some amazing bundled solutions, ERISA’s admonition to act solely in the interests of plan participants (and beneficiaries), alongside the requirement that those be reasonable in terms of cost and value, call for a careful and considered evaluation. 

In that vein, there are some “myths” that seem to be prevalent regarding those choices, perceptions that persist even today. Here are some points to consider:

An unbundled approach is more expensive.

The reality is, it can be—depending on the point of comparison. If all other things are “equal,” then certainly engaging another level of service and compliance oversight can bring with it additional costs. Then again, engaging the services of a third-party administrator[i] (TPA)—at least the right TPA—is hardly an “all other things equal” comparison. Their involvement and engagement may well streamline the time involved in reconciling data and contribution flows, could provide insights on plan design that could save money and enhance benefits, positions them to coordinate communications on plan audits—and, significantly, likely forestalls the need for plan corrections, fees and fines. 

It might appear to cost more on the front-end—but it could more than pay for itself in other ways.

With bundled solutions, there is a single point of contact.

With most bundled solutions, it’s probably more accurate to say that there is a single starting point of contact. No matter how gifted, talented and powerful the designated point of contact for a given plan is, there are inevitably silos of information and resolution. For example, legal questions are routinely passed along to other departments, payroll reconciliations in another—those resources are not only in another department, they may often be in another state—or time zone. 

That doesn’t mean there’s no value in that single designated contact—but it’s rarely a “one-stop” shop. 

Using a third party complicates communications.

Without question, adding a TPA to the plan’s “phone tree” does add another point of contact when it comes to communications regarding plan compliance or administration. On the other hand, the right TPA can actually centralize and even streamline critical communications between the plan sponsor and recordkeeper, or with payroll. It might look like another point of contact—but it could actually simplify and consolidate the number of calls that have to be made—and, more importantly, could reduce the need for calls to correct the misunderstandings inevitable in telephone “tag.”

TPAs are best suited for smaller plans.

Smaller plans—where plan designs frequently take into account specific objectives of the business owner (including complications of things like top-heavy testing)—are certainly a good fit for the expertise of a TPA. That said, issues with payroll, compensation definitions, eligibility evaluation and vesting determination are issues with which plans of every size and shape must deal—not to mention the correction process with the DOL and IRS when things don’t happen as they are supposed to. A good TPA can mitigate the former, and smooth the way with the latter, should the need arise. 

All TPAs are the same.

All of the responses above are conditional—on engaging the “right” TPA, or a good TPA. But TPAs, like bundled providers (and advisors), are comprised of individuals of varying levels of skill, talent, experience and commitment. It’s important to find the one(s) that fit your needs—and those of your plan sponsor clients. 

Things—administration, compliance, and yes, correction—have grown significantly more complicated over the years and today TPAs not only keep up with participant accounts, they can be an invaluable resource to plan sponsors—and advisors—on issues like regulatory compliance and plan design.  

That makes it hard to obtain an apples-to-apples comparison. Indeed, the fact that each record keeper has a different process for… just about everything, makes it easy for things to fall by the wayside if you don’t have a clear assignment of responsibilities with every party involved.

Those looking for a good place to start that assessment can find it in this year’s NAPA-Net Black Book listing of TPAs—or among the membership of our sister association, the American Society of Pension Professionals and Actuaries (ASPPA). 

Because sometimes the best way to keep things “together” is to break them apart…  

See also “What’s in a Name?” and Resource ‘Full’?

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[i] It’s worth noting that your recordkeeper is a TPA.

3 Pervasive Retirement Industry Myths

Ours is a complex and complicated business — constantly changing and evolving. And yet, there are key fallacies about today’s retirement system — and how it compares with what used to be — that will not go away.

Back in the good old days being “covered” by a pension plan meant you would actually get a full pension benefit.

We’re routinely told that “once upon a time” individuals used to work for a single employer their entire career, and that most of those workers were “covered by a workplace retirement plan, frequently a defined benefit pension.”

While defined benefit plans were certainly more common a generation ago, they were not as ubiquitous as is often assumed (see here).  

Moreover, while some workers did spend their working career at a single employer (and some still do, particularly in the public sector), the data show that for the very most part we have long been a nation of relatively short-tenured workers. How short? Well, the median job tenure in the United States — how long workers stay at one job — has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping.

What that means is that even workers who were “covered” by a pension plan in the private sector weren’t working with that employer long enough to get much — or any — of that promised pension benefit.

Only half of American workers have access to a workplace retirement plan.

Speaking of coverage, this is one of those statements that, while technically accurate, is somewhat misleading. Applied to all workers, that is what the National Compensation Survey (conducted by the U.S. Department of Labor’s Bureau of Labor Statistics) indicates. But it includes all workers, including very young, very low-income, part-time and part-year workers.

If you focus on full-time, full-year wage and salary workers ages 21-64, an analysis by the Employee Benefit Research Institute (EBRI) noted that in 2013, two-thirds of those workers — workers who might reasonably be expected to be covered by a voluntary workplace retirement plan under current law — did, in fact, work for an employer that sponsored a plan.

The average 401(k) balance tells us…anything.

Let’s say I told you that the average 401(k) balance in a survey sampling was $130,000 — would that be good or not?

What if I then told you that our sampling consisted of an individual who is 25 years old and has a 401(k) balance of $5,000, and an individual who is 64 years old and has a 401(k) balance of $255,000? How might that change your response? Would that tell you anything meaningful about the retirement readiness of that group?

Of course not — but surveys and coverage of those surveys routinely purport to glean a sense of retirement readiness from those kind of numbers. Despite the reality that they are comprised of savings totals for workers with a wide range of age, tenure, and savings rates — totals that are simply added together, and then divided by the number of workers in the sample.

The math on 401(k) averages is easy. The conclusions often drawn from that math, iffy. At best.

So, the next time you’re at an industry event and hear someone (who should know better) repeat one (or more) of those statements, or interviewed by a reporter who puts one (or more) of those presumptions forth as “proof” of the current system’s shortfalls, keep in mind that the data tells a different story.

And one that isn’t told often enough.

- Nevin E. Adams, JD