Bundled vs. Unbundled Retirement Plans
Thanks to our smartphones, we no longer need to bring our camera, laptop, and phone with us when we travel…but a lot of us still do. Why? Because our laptop is still better for writing emails and searching the web, and our camera with the zoom lens still takes clearer pictures. Convenience is great, but it often comes with a price.
Same can be said for retirement plans. 401(k) and 403(b) plans have several different service components to them which include: custodian, recordkeeping/administration, investments, and employee education. When one provider handles all of these different services, the plan is said to be fully ‘bundled’. On the other hand, if more than one company or firm is hired for different components, the plan is considered ‘unbundled’.
The advantages of a bundled plan are convenience and sometimes cost. However, the advantages of an unbundled plan can far outweigh those of the bundled. First, finding specialists in each area leads to higher levels of expertise across the different service areas, namely investments and education. Another critical benefit is the independent advice that comes with hiring unaffiliated parties. For example, a fee-based independent consultant should never have an incentive to propose one fund over another aside from their belief that it is the best option. Finally, with an unbundled plan you gain a system of checks and balances between the providers and the flexibility to change one provider without disrupting the other parts of the plan.
Can you imagine dropping your phone in the ocean the first day of your Caribbean vacation? Now, assuming you ditched the camera and Ipad when packing, you can’t take pictures, find the best restaurants on TripAdvisor, or make calls. Diversify!