An employer with a defined benefit plan needs to access many professional services related to the plan: investment management services, custodial services, benefit payment services, plan document services, administrative services, plan design consulting services, and actuarial services. If the plan sponsor chooses to have these services provided under the “bundled” approach, all or most functions are performed under the umbrella of one service provider. Unbundled services in a defined benefit plan means the various functions are performed by separate entities, which presents advantages for employers as outlined below.
- Accountability – Having multiple providers performing various functions creates a system of checks and balances. As a simple example, the actuary performing the valuation each year will be checking that benefit payments were made as expected and will make note of any unusual funds going in or out of the assets and will communicate any unusual activity to the plan sponsor.
- Expertise – One provider of all services may not have expertise in each of the various areas. For example, investment service providers focus on the assets, fees, and benefit payments; whereas the benefit administrator and/or actuary has a focus on plan design, funding and function of the plan. Of most concern is that services being provided are assisting the plan sponsor in maintaining the qualified status of the plan – making sure the benefit structure is legally appropriate, that nondiscrimination testing is done correctly, that participants receive the correct benefit, and that all forms and notices are provided and filed as required.
- Consulting Toward the Plan Sponsor’s Business Objectives – Similar to the expertise advantage, having separate providers allows the experts to hone in on and make the plan sponsor aware of opportunities for meeting their business objectives with minimal bias. For example, a sponsor of a frozen plan would benefit from their actuary being tuned into their needs with regard to time horizon of the plan and liability risk-reducing opportunities. At the same time, the sponsor will need the investment service providers to be aware of liquidity needs and higher level consulting opportunities such as liability driven investing (LDI). Less focused consulting or a biased approach could result from one entity providing both services. Instead, with multiple providers, the plan sponsor is presented with all possible opportunities and can make informed decisions that best meet the sponsor’s objectives.
- Multiple Professionals Sharing Varying Experiences – Having multiple service providers allows a client to benefit from past experience, varying philosophies, differing levels of education, and creative personalities. A good unbundled service provider will share ideas and solutions with other providers to capitalize on this value.
- Transparency of Cost – Bundled service providers typically charge asset-related fees, which makes it difficult to discern the cost of each function. Each unbundled service provider will quote and charge the plan sponsor individually, so there is no question of the cost of each service.
- Finally, having unbundled services promotes a working environment where the plan sponsor stays familiar with the plan. Often bundled services don’t require the plan sponsor to be directly involved in the administration and thus there’s a tendency to become disengaged from the plan. Staying involved with service providers and administration of the plan puts the plan sponsor in a position to protect the plan from errors.
Choosing service providers is part of the fiduciary duty of the plan administrator/plan sponsor of a qualified plan. When the plan is a defined benefit plan, there are complicated characteristics that require specific expertise by service providers. As you consider all the factors, it is likely you’ll find that going with unbundled services provides the greatest overall value.
Watkins Ross is an unbundled service provider, offering actuarial and administrative support services for defined benefit plans, as well as administrative services for defined contribution, 401(k), ESOP and post-retirement medical plans. If you need additional information, please contact us.