HOT TAKE: I prefer to work with Third Party Administrators (TPAs) over writing business bundled. Whew, there I said it, out loud in a public manner.
BTW, not a very hot take for those who've worked with me as a huge majority of the business I've worked on in my career I've chosen to partner with TPAs, even at the expense of revenue to my firm and commission in my pocket. Wanna know why? If not, stop reading.
Before moving on, let's first learn about what TPAs are and do and what bundled vs. unbundled is in the context of retirement plans. Retirement plans (401(k), ERISA 403(b), Pension, etc.) generally have two different broad components; the investments and services surrounding tracking of these and keeping records and the administrative area which centers around legal requirements, operating of the plan and compliance with the law, regulations and the governing plan documents. It is this second area that is the domain of the TPA.
When it comes to those administrative services, the vast majority of plans use a TPA since without one, the option is self administration. Unless your business is actually a TPA firm or otherwise in the field, self administering a plan is generally a poor idea. That said, when the TPA service a plan uses is directly provided by (embedded in) the recordkeeper of the plan, the firm providing the participant daily accounting, web experience, statements and call center, that's referred to as 'Bundled'. When the compliance services are provided by a separate company, the arrangement is unbundled.
In my experience, the perceived advantages of bundling are generally associated with making it easier for clients and with costs. Specifically, less vendors to interface with, and less confusion on where to go for answers or service needs. However, this is often more perception than reality. The bundled providers often structure service teams to be separate from the compliance teams and so, while it is one company, it's multiple departments within and so the 'number of cooks in the kitchen' is ultimately the same.
Similarly, the perception that costs can be reduced by bundling may or may not be true, it depends. Regardless, compliance services need to be provided and the workload for the individuals providing that service is identical and thus the resources needed are identical. The trick here is to understand how the bundled provider is collecting their fees. It is possible, likely, that they will illustrate lower fees for compliance to the client, but higher fees in other areas making apples to apples comparisons difficult. In my experience, true TPA costs are usually only different by minimal amounts (think hundreds, not thousands) and could go either way.
Bottom line: when it comes to costs, bundling actually makes it more challenging for fiduciaries to properly evaluate service providers and fairness of fees. What if the bundled provider is good at compliance but poor at recordkeeping OR providing investments. The client is stuck in an all-in-one set-up, and few vendors are great at everything they do. In that situation, a client has two choices, endure the poor service OR completely replace the entirety of the service which can be a real project for them as an employer.
What are the advantages of an independent TPA?
Perceived advantages are;
- Local TPAs can conduct in person meetings - Sometimes this is true, but with the proliferation of 'Zooming', this perceived advantage may be less important.
- Likely to receive more comprehensive boutique-style service, but also improved technical proficiency and competence - In the small plan market, this has absolutely been my experience. This is a matter of volume of similar, smaller clients with more sensitivity to ERISA Non-Discrimination rules OR with desires for custom employer contribution formulas.
- Often TPAs are more willing to work on pricing with retirement plan advisors who drive higher volume - Of course, this also ratches up the service expectations potentially to include 7-day/week access or faster turnarounds
- By decoupling the TPA from the recordkeeping/custody, they become easier to hold accountable as they can be replaced without a major project (usually). - From a fiduciary prudence perspective, the more services are decoupled, the easier they become to evaluate for necessity, fee reasonableness and service.
- Typically, the person at the TPA who is administering the plan is also the person managing the relationship. This usually means a better communication arrangement as administrators need to have both relationship skills as well as technical chops. - My experience is that sometimes this is true at the TPA, sometimes not, but is is VERY uncommon for the bundled administrator to also have top notch communication skills.
- The major advantage comes from flexibility of plan design. Simply put, TPAs can use varying documents, be nimble enough to amend plans on the fly and are the opposite of 'conveyor belt' style. - I've always deferred to the TPA when New Comparability, Cash Balance or other custom formulas are required. But I've also found that TPAs are often in the best position to opine around quality of local payroll or other benefit providers.
There are other reasons (I don't know if you picked up on the word relationship earlier in this post, eh hem, but that's the whole deal for me), but for me, the independent TPA simply allows more flexibility, often better process' and higher quality compliance services than is typically found at a bundled provider. Of course, as with any decision a Plan Sponsor makes surrounding plan services, they should evaluate who does their TPA work with due care and prudence. This means evaluate not only who their recordkeeper and investment provider is, but also what structure is right for them and understand how fees are gathered and what the fees are for.
As always, would love to here from the retirement plan community their thoughts on this topic. Thanks for reading!
- Jason Grantz, QPA, QKC, QKA, AIFA
