Benefits of Unbundled 401(k)s

Published in Wall Street Journal on January 4, 2013

By Pete Kirtland


Going forward, advisors working on company 401(k) plans are going to be graded on how well they prepare their plan participants to meet their retirement needs.  What an adviser should seek in a 401(k) partnership is the ability to provide the most cost-effective plan that produces the best result for clients.  These days, advisors can best accomplish that by adopting what I call “the iTunes approach” instead of the old-fashioned vinyl approach.


When we talk about building 401(k) partnerships, there are two models in the retirement plan space.  The old-fashioned one is called bundled. That’s where all the different services for 401(k) plans – financial advisory services, record keeping, third party administration and custodial services – are offered by the same entity.  In an unbundled environment, a different entity provides each of these services, and that’s their core competency.


One huge advantage of using the unbundled approach is that if for some reason one of those providers underperforms, you don’t have to throw the baby out with the bathwater.  You can simply replace the one element instead of replacing the entire plan.


The unbundled environment offers other forms of flexibility too.  When you deal with an institutional plan provider, their plan comes with a reselected fund line-up.  You might only like five of those funds, but you have to accept all 25 of them.  Just like a vinyl record, you have to take the good and the bad.  The problem with that is the institutional vendors don’t always pick those funds for the right reasons.  They might have profit motives that aren’t necessarily in the best interest of the participants, and that can lead them to include their own proprietary funds in the fund lineup.


As an advisor working in the unbundled environment, you have the freedom to choose the best selection of investments our there – much like creating your own iTunes playlist - that can help you focus on delivering the best results to the plan participants.   It can also keep costs down because you can now bring in lower-cost funds – like ETFs or index funds – that institutions may not offer.


Historically, a lot of big institutions operating in the bundled space have charged asset-based fees, meaning they charge for their services based on the size of a participant’s account.  They might charge a participant with a $500,000 account 10 times as much as a participant with a $50,000 account, even though the scope of the work is identical.


An adviser using the iTunes approach has the flexibility to choose service providers that charge a flat-dollar fee, where each participant is charged the same amount regardless of account balance.  More equitable fees are going to become increasingly important now that plan participants can see exactly what they’re being charged.   After all, the adviser who selects the service providers is going to be held accountable for fees that seem unfair.


Bundled, institutional 401(k)s cost more and have less flexibility, but they’re easier for advisers to use.  Working with unbundled plans, on the other hand, involves a bit more work.  But for advisers, the payoff for the extra effort is setting yourself apart by making participant outcomes the top priority.