Sometimes less really is more, at least that is what the recent legal action against plan sponsors has shown us.
Why would a plan sponsor have multiple recordkeeping vendors?
Historically, recordkeeping vendors offered platforms to plan sponsors with an investment window with either a proprietary fund menu or a limited number of investment offerings. This was because many of the mutual fund companies had a separate recordkeeping business. For example, TIAA Crefs’ recordkeeping platform would offer a suite of investments to its clients which consisted of mainly TIAA annuities and affiliated mutual funds. Another example is American Funds, they would offer their recordkeeping platform an investment offering that solely consisted of American Funds investments or what is called a proprietary fund line up (meaning funds relating only to their firm). This limitation led employers to seek additional providers to give participants access to additional investment offerings offered by other mutual fund families.
For example, if you wanted access to products similar to Vanguard or Fidelity you would have to go to those recordkeepers to access their funds. This meant a plan sponsor could potentially be offering two or more vendors to meet their participants’ needs to diversify investments with multiple money managers.
Overtime, we saw a shift as recordkeepers decided it would be in their best interest to offer additional mutual fund families, including nonproprietary funds. This would enable the recordkeeper to capture a plan sponsor’s assets for recordkeeping even if that plan sponsor desired to diversify among other mutual fund managers. Gradually, we saw recordkeepers move from fully-exclusive offerings to more limited offerings with some additional fund managers being added, to now what we would refer to as an “open architecture platform,” which allows a plan sponsor to create an investment menu using any mutual fund, index, or exchange traded fund, etc.
Why is having multiple vendors a challenge for plan sponsors?
Plan sponsors are ultimately responsible for the oversight of their retirement programs vendors or covered service providers. This means the plan sponsor and its fiduciaries are required to review the offerings and fees of each vendor and make sure they are appropriate and clearly communicated to plan participants. Sounds easy enough…except in a multi-vendor retirement program, the plan sponsor is required to provide due diligence to each vendor which has its own unique expenses, fee structure, and administrative capabilities. In addition, it is ultimately the plan sponsors responsibility to clearly communicate the offering of the multi-vendor platform and help plan participants understand the underlying fees and offerings of each vendor.
Fees in a multi-vendor offering
The fee a recordkeeper charges a plan sponsor for administration is comprised of several components and is based on the assumed amount of assets being record kept by that vendor. Usually the more assets a vendor record keeps, the lower the fee is as a percentage of assets. Concerns surrounding fees in a multi-vendor platform focus on a few issues including overall program cost, fee structure, the varying costs of multiple vendors, and plan parity.
Program Cost, Economies of Scale: In recent lawsuits brought against plan sponsors, plaintiffs claim that using multiple record keepers results in excessive administrative and record-keeping fees for participants because it does not leverage all the plans assets to take advantage of economies of scale to drive lower pricing.
In addition, recordkeeping fees often include the Third-Party Administration and Custodial fees associated with the platform. These fees (TPA and Custodial) are unique to each recordkeeper as those vendors have pre-negotiated fees based on the level of assets and overall relationship. This means the underlying fees can vary from vendor to vendor, if not negotiated directly with the plan sponsor.
Fee Structure: Each vendor has a preferred method to structure their fees, and possess the capability to charge fees to the plan sponsor and participants in different ways including a flat fee, an asset based fee, a per head fee, or any combination. This means not only can the fees vary from vendor to vendor, the structure in which the plan sponsor or participant is charged can vary.
Various levels of Expense: As discussed, each vendor will have their own cost of doing business which can result in a different level of expense associated with each platform.
Here is an example of the fees in a multi-vendor platform versus a single vendor offering.
As you can see, a participant at ABC company offering one vendor platform has one explicit fee for recordkeeping, in addition they would pay the related investment expense affiliated with their investment elections. A participant at DEF Company has three platforms to choose from which all bear a different administration expense and have various underlying investment menus.
Why does this matter? A plan participant might be paying more to be invested in one platform than another. The participants could be at a disadvantage over time as they are paying higher fees for plan administration. In the recent court cases, plaintiffs are alleging plan sponsors are in violation of their fiduciary responsibility in these situations.
Administrative differences that can occur in a multi-vendor offering.
Each recordkeeper has its own strengths whether it be technology, customer service, or the ability to provide retirement planning tools to participants. Each recordkeeper also has its own prototype plan document which serves as the plan administration guide to the plan sponsors who adopt the agreement. The prototype document serves as a template allowing for some customization and ultimately will serve as a plan administration guide for that adopting employer. These plan documents are developed by the recordkeepers using their interpretation of the law, and also developed with the specific vendor’s administration and system capabilities in mind.
What does this mean? This means not all recordkeepers offer the same plan document, and they cannot all administer a plan exactly the same as their competitors which can cause plan provisions to vary from vendor to vendor in a platform. Even if a customized plan document was created and being administered by each separate recordkeeper, there are system limitations that inhibit a vendor’s administration capability.
Some areas we might see administrative differences include:
- loan administration
- enrollment and beneficiary management
- electronic investment advice/roboadvice
- crediting rate on fixed accounts
- personal account management capabilities
Why does this matter?
An employee could be put at a potential disadvantage if the vendor they chose does not offer the same administrative capabilities, timely administration, and tools that another vendor may offer.
So what now?
The concern regarding the inefficiencies of multiple vendors, including the heightened oversight required by the plan sponsor, is valid. The multi-vendor offering may be justified in some cases if there is really a benefit to the plan participants because of offering multiple vendors. We haven’t seen how the courts will rule regarding these claims; however, in the meantime there are a couple of considerations for plan sponsors: review and benchmark and consolidate or pay any recordkeeping directly to avoid passing fee inefficiencies to participants.