Industry Insight from Fred Barstein
Understanding Defined Contribution Service Models

Defined contribution (DC) and particularly 401(k) plan service models can seem awfully confusing but in reality they are quite simple.  Though there are many ways to design a corporate retirement plan, there are only three basic DC service models.  Advisors should leave plan design to experienced TPA’s, but they do need to understand the service models to better serve their clients and fashion the right business model for themselves.

As shown below in "Chart 1", there are three types of services made available by providers which include:

1. Plan Administration - plan design, consulting, Form 5500 preparation, discrimination testing, etc…

2. Record Keeping – Websites, participant statements, money tracking, etc…

3. Investments – Trading, clearing, access to funds, and usually employee communication & advice

Within these three services, there are three service models:

1. Bundled – The record keeper performs all services and acts as gatekeeper to the investments available which can be limited as made popular by Fidelity and Ascensus [SEE PROFILE], who is unique because they have an open architecture investment approach.

2. Unbundled – The record keeper uses local TPA’s to perform plan administration and does all the rest of the work as made popular by John Hancock [SEE PROFILE] and other providers like The Hartford [SEE PROFILE], ING [SEE PROFILE], and Lincoln [SEE PROFILE].

3. Open Architecture – The TPA licenses their own record keeping software and uses a 3^rd party clearing firm like Schwab, Fidelity, TD Ameritrade or Matrix; there are almost 500 TPA’s using either Relius, Schwab RT, Investlink or ACS record keeping software. 

The unbundled model is the most popular in the Micro (<$1 million) and Small ($1-$10) Markets (see "Chart 2" below) and has been growing at the expense of bundled plans over the past five years with providers like OneAmerica jumping on board [SEE PROFILE].  With a local TPA, providers are better able to customize plan design to meet the specific needs of the owners and highly compensated employees while offering local service through a person with ties to the community.  As one advisor so aptly pronounced, she likes the bundled model offered by companies like Securian [SEE PROFILE] because there is one throat to choke and costs can be lower and seamless because one company is providing all of the services.  Enjoying a +30% market share in the Small and Micro markets, the open arch model threatens to grow the fastest in coming years as sponsors, advisors, and regulators gravitate to less costly and fee transparent models that offer investment flexibility. Proponents of this model include Alliance Benefit Group [SEE PROFILE], RSM McGladrey, [SEE PROFILE] and NextStep [SEE PROFILE].

So which model is best?  Obviously, that depends on the advisor and the needs of their clients.  ADP [SEE PROFILE] and Paychex, the fastest growing national providers, are bundled.  Many insurance companies that dominate the smaller markets are moving to unbundled products like OneAmerica.  The mid market is and continues to be bundled as larger plans can afford greater customization and higher levels of service, epitomized by providers like MassMutual [SEE PROFILE].  Though the Elite 5000 DC Advisors, defined as those with more than 10 plans, $30 million, and 3 years of experience are naturally attracted to open arch, a model which takes more work and time, their appetite is somewhat muted as they take on more plans and their fees keep getting squeezed .  Blind squirrels will use the model of the wholesaler they last met with or who pays the most for the least amount of work – the interesting dynamic is to watch where the Elite Advisors are headed as they gradually erode the market share of blind squirrels and direct sold plans.

CHART 1 – SERVICE MODELS

CHART 2 – MOST POPULAR MODELS BY MARKET

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