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Design a Good Group Retirement Plan Part 4: Unbundling Advantages


Having an unbundled structure for your group retirement plan gives greater transparency and also reduces conflicts of interest. A bundled structure could put your money and your retirement at stake.

Last time I discussed the potential pitfalls your group’s retirement plan may be making if you use a bundled structure. To review, in a bundled setup the retirement plan deals with one service provider for recordkeeping, investments and admin services, but the fees you pay are generally not transparent. Plus it creates an inherent conflict of interest due to revenue sharing agreements between fund companies, brokerage firms, and financial advisors.

Hidden costs of share classes

One way to lower fees in a bundled plan is to change the share class of the funds being offered. Different share classes of a mutual fund invest in the same pool of securities and have the same investment objectives, but the fees and performance are different for each share class. Unbeknownst to many plan trustees and plan participants, you may not be provided with the lowest cost share class in your plan lineup.

For example, take a look at the John Hancock Small Company fund. This fund has five share classes for retirement plans, labeled R1 through R5:

Suppose your plan provider only offers you the R1 share class, which has total operating expenses of 1.8% annually and suppose the aggregate amount of assets across all participants invested in this one fund is $1 million. In that case, about $18,000 in annual expenses are being paid to the fund, which then turns around and distributes that expense via revenue sharing arrangements to various parties (advisors, brokerage firms, etc.).

What your plan provider may not tell you is that the R5 share class can save your plan thousands of dollars in fees since it charges 1.1% annually or $11,000. So if you’ve got a bundled plan, ask your provider to offer you the lowest cost share class. This automatically results in higher investment performance. Better yet, request your plan provider to offer you institutional share classes, which have even lower fees than the R share classes.

Advantages of unbundling

The first step to create a good group retirement plan is to make sure you have hired fiduciaries who are acting in the plan participants best interests.

The second step is to use an unbundled structure so that every fee is disclosed. With the unbundled structure you get greater transparency since you will see a line item of every fee that is being deducted from the plan (investment advisor fee, recordkeeping fee, etc.). It also reduces conflicts of interest since each service provider is independent. Furthermore if an advisor uses any funds that participate in revenue-sharing fees, then those fees should be fully refunded back to the plan, thus reducing total plan costs.

The unbundled structure also gives plan participants access to lower cost mutual funds since revenue sharing arrangements are eliminated. It also allows that plan trustees to better meet their fiduciary obligations to plan participants.

Ask and ye shall receive

If you’re currently stuck in a bundled plan, then read your new 408(b)(2) disclosure to find out where the money is going. You should know how your service providers and advisor are being paid; the dollar amount of expenses you are paying in your fund lineup; what amount is being paid via revenue-sharing arrangement; and what indirect or noncash forms of compensation your advisor is receiving. Then approach your provider and advisor and have them explain what conflicts of interest they have and request that they add lower cost fund choices and share classes to your plan.

If you are part of an independent emergency medicine group, then approach your plan trustees and ask them to unbundle your group retirement plan. After all it’s your money and your retirement at stake.

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Victor J. Dzau, MD, gives expert advice
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