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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Bundled 401(k) plan services

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email

Q: All financial firms we use offer free documents for one person business 401(k) plans. Generally, an investor in a Single k should not be modifying a document and neither should you. As a marketing strategy, firms offer the documents for free. The profit is in the asset management, not the documents.

A: Yes this combination of asset management, accounting, trustee services, recordkeeping, reports, plan documents and tax filing for 401(k)s (known as a "bundled service") is clearly the most popular way to operate a 401(k) plan but it is important to recognize a few factors: 1) Some investors want to avoid asset-management charges and they are certainly entitled to do that. They probably have not come to the conclusion that this method is the least expensive way to operate a small 401(k) plan. An "unbundled" 401(k) plan is more expensive than any of the popular bundled services. 2) Do-it-yourselfers tend to ignore the fact that 401(k) plans require the service of a third party as trustee. Failure to do so would certainly cause any 401(k) plan to collapse with disastrous tax consequences. There is no such thing as a 100% do-it-yourself 401(k). Professional help is always needed from one source or another. 3) The source or format of documents is not one of the major reasons that 401(k) plans run into trouble. IRS estimates that about 40% of plans do not meet legal requirements. The majority of these problems have little or nothing to do with the plan documents. There is no indication that the failures are linked to the source or format of the plan documents. 4) There is nothing sacred about professionally prepared master/prototype documents as compared to individually prepared plan documents. The relatively few problems arising from plan documents usually stem from failure to maintain and update plans rather than with the original plan document. Using a professional financial firm to run the bundled 401(k) practically eliminates this risk. 5) We do not charge any fees for asset management, so there is no financial incentive to endorse this approach. Yet we feel that the message that should be conveyed is that bundles 401(k) plans are a great deal for small businesses. The costs today are significantly less than fees for similar services a few years ago. 6) Our conclusion is that there is no practical need for "unbundled" 401(k) plan services except in rare circumstances where a business owner wants a custom-designed plan. In this case, the higher cost is anticipated and may be justified. This is the reason that Freedom Benefits ( ) stopped offering these separate services to most small businesses and now refers these plans to instead.


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