Bundled vs. unbundled 401(k) providers

When selecting a 401(k) provider, as an employer, you'll likely have to decide if you want to work with an unbundled or a bundled provider. You can think of a bundled provider as a provider that offers most of the necessary services involved in a 401(k) plan, such as: 

• Investment management

• Recordkeeping

• Employee 401(k) education

• Annual compliance testing

Unbundled providers can also provide the same services. However, they generally allow the employer to choose different providers. Rather than providing all of the services in one package, unbundled providers allow employers more flexibility to create their own 401(k) plan. 

Choosing between unbundled and bundled providers will most likely depend on several factors, such as your budget, services needed, and complexity of your 401(k) plan. This article will detail what you can expect with a bundled plan versus an unbundled plan and the steps you can take to decide which type of provider is right for you. 

Main 401(k) administration services

To understand the true value of what a bundled or unbundled provider can do for you, you’ll want to familiarize yourself with a few of the main 401(k) plan services that are generally included in a bundled provider. These services include, but are not limited to: 

• Recordkeeping: Recordkeeping is one of the most time-consuming tasks of maintaining a 401(k) plan. A 401(k) plan provider that offers recordkeeping services is responsible for maintaining correct records of all activity (contributions, distributions, earnings, etc) by source, participant, and investment. 

• Compliance testing: Every year, the IRS requires that all 401(k) plans pass nondiscrimination tests to ensure that a 401(k) plan does not unfairly benefit certain types of employees over others. While you can certainly outsource compliance testing with an unbundled provider, oftentimes it is much easier to use a bundled provider that already manages your plan administration and recordkeeping. 

• Investment Advisory or Management Services: 401(k) providers may provide investment advisory or management services to plans through their registered investment adviser (RIA). The RIA might be a subsidiary of the 401(k) provider. These types of services include, but are not limited to: helping the plan sponsor select the investment lineup, recommending portfolio allocations for plan participants, automatically rebalancing participants’ portfolios, and/or having discretionary authority over the plan’s fund lineup. 

• Asset Custody: Some 401(k) providers may be able to directly act as the custodian for your plan’s assets, or they may utilize a designated, third-party, qualified custodian to hold your plan’s assets. 

• Plan administration: Plan administration involves processing employee contributions and distributions to their 401(k) accounts, monitoring plan activity, and providing customer support to plan participants and plan sponsors. 

Bundled vs. unbundled 401(k) providers

If an employer decides to use a bundled provider, they may not have to worry about managing different providers for recordkeeping, third-party administration, investment advisory/management services, or plan custodian duties. Some bundled providers, such as Human Interest, even provide additional services such as employee education. Because of this, bundled providers can be easier to manage for plan sponsors because there aren’t multiple providers involved.  

On the other hand, unbundled providers allow employers to have more flexibility when it comes to plan design, because employers are able to choose what service providers they want to include in their plan. Unbundled providers can allow employers to choose which provider to use for their plan custodian, third-party administration, financial advisor, etc. Though most 401(k) plans do not usually require significant customization, an unbundled provider can be a good option for plan sponsors who are more particular about the services they want. 

How to choose between bundled and unbundled 401(k) providers

When choosing between a bundled and an unbundled 401k provider, there are several factors to consider. The most important levers in your decision will most likely depend on cost, plan customization, and services needed. 

1. Cost

When it comes to costs, the main difference between bundled and unbundled providers is flexibility. Bundled providers often charge an advisory fee or “assets under management” (AUM) fee as a percentage of plan assets, as well as other fees such as recordkeeping fees. For new plans or plans with smaller assets, a bundled provider may be a better fit because the dollar amount paid in asset fees would only increase as their plan assets increase. Unbundled providers, on the other hand, may charge based on a fixed-fee agreement which can give employers more flexibility in how they want their fees structured. 

2. Plan customization

Unbundled providers may be suited for plan sponsors that need specific features such as prevailing wage or ROBS; however, bundled providers can often also provide just as much flexibility in plan design as well. At Human Interest, we offer employers the ability to customize their own matching contributions, vesting schedules, automatic enrollment, and much more. 

3. Services

Plan sponsors who do not want the hassle of managing different providers for multiple services may  find bundled services to be a better option. Some bundled providers will handle all recordkeeping functions, employee education/advice, administration tasks such as payroll integration, and even select 3(16) fiduciary responsibilities. Some unbundled providers may make managing each of these individual services harder, and potentially more time-consuming depending on the level of fiduciary responsibility you are willing to assume. 

Human Interest offers bundled, flexible 401(k) & 403(b) retirement plans. You can choose from pre-built plans, or build your own. From safe harbor provisions to flexible eligibility and vesting options, employers can customize their plans around their needs. And for select plans, we serve as your plan administrator and 3(16) fiduciary. Contact us today with questions.