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Why Hire an Unbundled Service Provider?

Amber M. Lloyd, APA, CMFC, CFP®, ERPA | TPA Services | July 28, 2014

As a Third Party Administration (TPA) firm we are often asked by employers and their financial advisors, “Why should we use an unbundled services arrangement?” To answer this question, let’s distinguish between unbundled and bundled services.

To properly administer a retirement plan, there are typically three services that an employer needs:

1) investment services, the picking and monitoring of investment options available in the plan;

2) recordkeeping services, the process of keeping track of individual participant account balances by type of money (for example, employee deferrals, employer match, rollovers, etc.) and by investment option; and

3) administrative services, which includes the design of the plan, maintaining the legal document and preparation of all required compliance testing and governmental reporting.

Some employers may choose to add a fourth service by using an attorney to handle the plan’s legal documents, rather than using plan documents provided by the administrative firm.

In a true “bundled” service arrangement, all services are provided by the same company or financial institution. However, this is rarely ever the case as most employers are “unbundled”, at a minimum, with respect to investment services for which they hire a financial advisor. We believe best practice for most employers would also be “unbundled” with respect to recordkeeping and administrative services.

The perceived disadvantages of “unbundling” recordkeeping and administrative services generally fall into two areas – 1) the belief that adding more parties adds more cost, and 2) the belief that adding more parties adds more complexities for the employer. Let’s examine these perceptions and then consider the added benefits of an “unbundled” arrangement.

More Parties Equates to More Cost

Regardless of the arrangement, the same services needs to be performed for the plan, whether the services are completed in a “bundled” or “unbundled” environment. As a result, the overall cost is generally the same. The difference is that in the “bundled” environment most of the costs are typically calculated on and charged against the assets held in the plan rather than being directly billed to the employer. This same structure can easily be accommodated in an “unbundled” environment – all an employer or their financial advisor needs to do is ask! The “unbundled” arrangement actually provides the employer with more flexibility to structure costs, as it can choose how much it wants to pay out of corporate assets versus how much it wants to have the plan participant’s pay – either as a charge against the assets or a bill to the trust.

More Parties Equates to More Complexity for the Employer

In reality, even in a “bundled” offering, each of the service areas is handled in separate departments within the same institution. So, an employer will likely deal with as many, if not more, parties. With an “unbundled” model, the majority of the contact by the employer is with the TPA that provides the administrative services for the plan. You will talk to and deal with your TPA on a day-to-day basis and they will often serve as the quarterback for dealing with the recordkeeper when needed for payroll or distribution issues, or the attorney , if the employer chooses to use one.

Extra Benefits with the “Unbundled” Structure

The additional benefits of using an “unbundled” arrangement include – 1) the ability to replace one service provider without changing them all; 2) more sophisticated plan designs and plan documents; and 3) more comprehensive and technically proficient services.

In an “unbundled” arrangement, you can replace one service provider relatively easily if they fail to meet service standards for the plan. Making the same change out of a “bundled” arrangement can be burdensome and can disrupt long term relationships that the employer has come to value when one party to the arrangement is no longer acceptable.

In a “bundled” arrangement, the financial institution is often looking to standardize the services provided for all of their clients. As a result, they generally only make available basic design options and plan documents. If an employer requires something more custom they are just out of luck. In an “unbundled” arrangement, a TPA can customize each plan to fit the employer in question. A TPA will also generally be better about contacting employers about the real world impacts of design changes initiated by the employer or those mandated due to changing governmental rules.

Lastly “bundled” service providers generally provide services via service teams and call centers. These departments are often staffed with relatively inexperienced employees who rely on training manuals to answer most employer questions rather than dedicated professionals who are familiar with the employer’s plan. Much of the training that the staff at the “bundled” provider receives is focused on customer service and telephone etiquette, not on understanding the technical aspects of the plan administration. On the other hand, the staff at a quality TPA firm has more comprehensive technical training and many more average years of experience in the industry than their “bundled” counterparts. More training and practical experience also allows a good TPA to prevent many data and compliance mistakes that an employer might inadvertently make. A competent TPA will review the data the employer provides to them and will work with the employer until good data is received. A “bundled” provider is generally shielded from their mistakes by caveating that their reports are based on information the employer provides, which they do not review or scrutinize. They simply load it into their system and print off the resulting reports. Unfortunately, if the employer has not provided accurate data, it becomes a scenario of “garbage in, garbage out.”

Why Should You Use an “Unbundled” Services Arrangement?

The perceived disadvantages to unbundled arrangements are just simply not true. Regardless of the arrangement, the true “all in” cost is not that different. With an “unbundled” arrangement, the employer will receive more competent and proactive service, which benefits not only them but also the financial advisor. Lastly, if an employer is unhappy with any part of their service package, their hands are not tied as they can replace the poor provider without eliminating them all.





Employer Contributions Key to Retirement Saving

Kevin McGuinness

Aug 12, 2014 --- More than four in ten (43%) employees surveyed by Fidelity Investments say they would settle for lower pay if it meant they received a higher employer contribution to their retirement plan accounts. ---

The survey focused on various compensation scenarios to determine how much value employees place on a 401(k) employer match when making decisions about new job opportunities. Employees were more likely to accept a position that had an employer match as part of its overall compensation package. Only 13% say they would take a job with no company match, even if it came with a higher pay level.

“Employer contributions play a vital role in helping Americans reach their retirement savings goals, with these contributions representing more than 35% of the total contributions on average to an employee’s workplace savings account,” says Doug Fisher, senior vice president of Workplace Investing at Fidelity, based in Boston.

He adds that Fidelity recommends a total retirement saving rate between 10% and 15% of salary to ensure employees will have enough for retirement. However, the survey notes that many working Americans will only reach that savings level if their 401(k) contributions are complemented with an employer match.

According to the survey, a 401(k) plan is the sole retirement savings vehicle for an increasing percentage of U.S. workers, with 42% saying they are not saving in any capacity outside of their 401(k) account. Yet personal and retirement savings are expected to fund a significant portion of workers’ retirement income. Fidelity recommends that individuals save enough to replace 85% of their net final pay, and more than half of that income is expected to come from individual retirement savings. As a result, employer contributions have become increasingly important, and a key factor in helping individuals meet their retirement savings goals.

Fidelity 401(k) data finds that 79% of workplace savings plans currently offer some type of employer contribution—such as a 401(k) match or profit sharing—which covers 96% of Fidelity’s 13 million plan participants. As of June 30, the average employer contribution was 4.3%, with employers contributing an average of $3,540 per employee annually. This is more than $1,000 higher than the average employer contribution 10 years ago.





Trading salary for a higher 401(k) match

By Marlene Y. Satter

August 12, 2014

It sounds counterintuitive, but a Fidelity Investments survey indicates that 43 percent of workers weigh employer matching funds in their 401(k)s so heavily that they’d accept lower pay so long as it came with a higher match.

The survey highlighted the fact that employees feel employer contributions such as matching funds or profit-sharing are one of the most important parts of a benefits package. It also showed that only 13 percent of workers were willing to consider a job that came with no company match, even if the pay were higher.

Also read: Which firm has the most lucrative 401(k) plan?

The study presented several different compensation scenarios to determine how heavily a 401(k) match weighed in an employee’s decision on whether to take a job. Since it also found that 42 percent of workers have only a 401(k) for their savings and were not putting money away anywhere else, it’s natural that employees would attach considerable importance to matching funds — particularly since they may not be able to save enough without them.

“Employer contributions play a vital role in helping Americans reach their retirement savings goals — these contributions represent more than 35 percent of the total contributions on average to an employee’s workplace savings account,” said Doug Fisher, senior vice president of workplace investing at Fidelity.

Fidelity, as is the industry standards, recommends a retirement saving rate between 10 and 15 percent of salary to ensure employees will have enough for retirement. “But many working Americans will only reach that savings level if their 401(k) contributions are complemented with a company match,” Fisher said.

Fidelity 401(k) data indicate that 79 percent of workplace savings plans offer a match of some kind, whether it’s matching funds for 401(k) contributions or profit-sharing.

As of June 30, the average amount of employer contributions was 4.3 percent at an average of $3,540 a year.

That’s more than $1,000 higher than it was 10 years ago, but Americans need a lot more than that.

More than half of retirement income, according to Fidelity, is expected to come from individual retirement savings, which means that employer contributions are more important than ever, since they’re “a key factor in helping individuals meet their retirement savings goals.”




More Rules Than You Think: Vesting Schedule Changes



As practitioners are restating plans, some are considering changing the vesting schedule. Such changes are subject to several different rules, some of which are of fairly recent origin. As a result, errors (either in the document or in operation) are all too common. Practitioners should keep the following principles in mind:

Changes to a plan’s vesting schedule include more than changing the actual schedule. It also includes changes to the service used in applying the schedule, such as adding the rule of parity, where the plan previously did not use it, or changing the normal retirement age (because participants fully vest on attaining that age). Any change which can affect vesting, now or in the future, could be subject to the limitations below. Moreover, the word “change” embraces plan mergers and spinoffs, as well as plan amendments.

Rule 1. Cannot reduce percentage. A change cannot result in a participant having a lower vested percentage than the participant did before the change. Code §411(a)(10)(A). Notice that this prohibits a lower vesting percentage, not merely a lower vested interest. As such the limitation affects benefits accruing before and after the date of the change.

Example 1: Plan V has a 6-year graded vesting schedule, and amends to a 3-year cliff vesting schedule. On the later of the date the amendment is adopted or effective, Jan has 2 years of service and is 20% vested in her $10,000 accrued benefit. Although she would have no vesting at all as a result of the amendment, the amendment cannot reduce her vested percentage to less than 20%. This rule applies not only her “old money,” her current $10,000 benefit, but also to any “new” money, other amounts credited to her account in the future (such as top-heavy minimum contributions).

Rule 2. Cannot reduce future vesting in prior benefits. A change cannot result in a participant having slower vesting with regard to the participant’s existing benefit. This is an application of the anti-cutback rule. Treas. Reg. §1.411(d)-(3)(a)(3). See examples 3 and 4 at Treas. Reg. §1.411(d)-(3)(a)(4).

Example 2. Plan W provides that the normal retirement age is age 60, and uses a 6-year graded vesting schedule. W amends the plan to change the normal retirement age to age 65. Jack is 58 and has 2 years of service. While the amendment can apply to future contributions, it cannot apply to the $8,000 of employer contributions already credited to Jack’s account. Jack must be fully vested in those contributions at age 60. The plan can provide that future contributions will have a normal retirement age of 65; however, this would require that the plan maintain separate accounts for the “old” money, subject to the old vesting schedule, and the “new” money, subject to the new schedule.

  1. Vesting Schedule Election. If a participant has at least three years of service, the plan must give the participant the right to elect to have his or her vested interest determined without regard to a change in the vesting schedule (unless the change is entirely benign). If the participant so elects, then the change does not take effect for the participant for new and old money.

Example 3. Plan X uses a 6-year graded vesting schedule. Jean has 3 years of service (20% vested) and an account balance of $15,000. The employer amends the plan to provide that the rule of parity applies to vesting. The plan must give Jean the ability to elect to disregard the amendment. If Jean does not so elect, then the amendment can apply to her new money (contributions after the date of the amendment). Regardless of Jean’s election, the amendment cannot apply to the old money, her prior balance, or else the plan would violate rule 2, above.






Retention of Plan Documents

August 15, 2014 by Melissa Travis, JD, LL.M., Research Analyst, ERISA Services

As a plan sponsor, you have a duty to maintain sufficient records for a period of time. But what does this statement really mean? How long is this “period of time”? What are “sufficient records”? What are the consequences of not retaining such records or of losing them? Rest assured, these questions (and more!) will be answered for you in this post.

how long must an employer maintain sufficient records?
ERISA has two retention provisions pertaining to what documents to keep and for how long; both ERISA § 107 and ERISA § 209 apply to all ERISA plans. According to ERISA § 107, anyone who files or certifies certain information (e.g., Form 5500s) must keep the records for six years after the filing date or from the date of any extended date for filing.

ERISA § 209 gives more guidance on keeping certain records. With this provision, the time frame with which a plan administrator must comply is extended significantly. This is clear within the language of the statute, which provides that the length of time for retention is “as long as [the documents or records] might be relevant to a determination of the benefit entitlements of a participant or beneficiary.”1 So, even though one ERISA provision only requires plan sponsors to retain certain documents for six years while another requires plan sponsors to keep certain documents for an indefinite amount of time, best practices encourage plan sponsors to hold such documents forever.

What are sufficient records?
A sufficient document or record could mean any kind of record, from plan documents to amendments to email correspondences to work records like spreadsheets. So, it’s clear that for ERISA § 107, all plan documents and anything that may be useful in filing a 5500 have a retention period of at least six years. As for ERISA § 209, all plan documents and anything that might be relevant in determining the benefits of a participant or beneficiary must be kept indefinitely.

Who is responsible for keeping these records?
Some employers may think, “I don’t have them on hand, but my third-party administrator does, so we’re meeting the ERISA requirements.” This is not entirely correct. It is the duty of the plan sponsor to maintain these documents. It may be the case that a plan sponsor has complied with ERISA because the contracted TPA does, in fact, have every plan document from the inception of the plan until now, but what if there are missing documents? Who is liable if the TPA does not have a document? The liable party is most likely the plan sponsor. As such, best practices encourage that the employer should have access to all relevant documents.

What are the consequences of not having the documents?
ERISA § 107 imposes no penalty, and ERISA § 209 only imposes a minimal penalty for $10 per employee affected in the event a failure to maintain records pursuant to the law.

But this failure to maintain records is much more far-reaching than made clear from the statutory provisions. Litigation could result from such a failure; in such an instance, an employer could find itself expending both man hours and litigation fees in defense of a lawsuit. There could be a suit based on a claim for benefits where the employer might have to prove the accuracy of how benefits amounts were calculated. Without sufficiently retained documentation, such a case could be a total nightmare for an employer.

Alternatively, failing to preserve records may subject a plan sponsor to an ERISA violation for failing to provide document disclosure upon request by a participant; this failure can lead to a statutory penalty of $110 per day for each document not disclosed upon request. Furthermore, a failure to retain documents may subject a plan sponsor to fiduciary breach. An employer could find itself defending claims not simply for failing to keep documents, but also for the resulting breach. In that event, the fiduciary could find himself or herself personally liable for surmounting statutory fines.

How should you avoid the pitfalls associated with inadequate document retention?
One of the best ways to avoid the common pitfalls associated with lackluster document retention is to make sure that you have a clean, well-organized storage place to maintain all your documents from the inception of your plan. Another way is by making sure you understand what documents need to be retained. Here is a list of some of the documents you should make sure you keep:

  • the first legislatively-required amendment for the plan;
    • the last in-house decided optional plan amendment, and every amendment in between;
    • every summary plan description or summary of material modification from the inception of the plan as well as every basic plan or trust document;
    • the first and each subsequent adoption agreement, all ancillary documents like QDROs or loan procedures; and
    • everything else that relates to the operation or establishment of the plan.

Our ERISA Services team can work with your plan to compile a database of all available and relevant plan documents. In addition to a plan sponsor’s own retention of original records, we create an electronic database to house copies of all the documents. In the event a participant requests plan documents or the employer needs a copy of a certain plan document, it should be as simple as accessing the database and doing a quick search through the files. And in the event there are missing documents, the database will reflect this as well.