PLANSPONSOR - June/July 2019 - 51

INSIDE ANGLE
The Bundled
Arrangement
Has groupthink distorted this marketplace?
E
very so often, it's worthwhile to examine misperceptions
that exist in the marketplace in order to consider whether
momentum and groupthink have caused us to deviate
from guiding principles. Doing this type of analysis is especially
important when managing retirement plan assets. In respect to
groupthink, the onslaught of litigation involving plans subject to
the Employee Retirement Income Security Act (ERISA) has distorted
marketplace practices and has foreclosed otherwise available
opportunities available to ERISA plans.
One of those opportunities that plan fiduciaries often forgo
in an effort to avoid litigation has been the use of so-called
" bundled " arrangements. In the context of a 401(k) plan, having
a bundled arrangement is generally understood to mean that the
plan obtains recordkeeping services and some or all of its investment
options from one recordkeeper and its affiliates.
As with any other plan arrangement, plan fiduciaries that
are considering entering into some form of bundled arrangement
should assess the qualifications of the provider, the quality
of services offered and the reasonableness of the fees. Further,
the fiduciaries should recognize that there are advantages to
combining recordkeeping services with plan investments and
these advantages have been recognized in federal court decisions.
Lower Recordkeeping Fees
In some instances, there are good reasons for plan fiduciaries to
combine recordkeeping services with plan investments. The most
obvious is the availability of lower recordkeeping fees. While a
recordkeeping service agreement may not explicitly list a discount
for selecting affiliated investment fund(s), the recordkeeper generally
prices its services on the assumption that a certain amount
of plan assets will end up in investment funds managed by its
affiliates. Where this is the case, the recordkeeper will price its
recordkeeping fee lower compared with the fee it will charge if no
affiliate funds appear in the plan's investment lineup.
Given the attention paid to plan fees under ERISA, the
availability of lower fees in the context of bundled arrangements
should not be ignored by plan fiduciaries, who must act prudently
to " defray reasonable expenses of administering the plan. "
ERISA generally requires that plan fiduciaries act prudently
in selecting and monitoring all investment funds included as
plan investment options. Whether or not a fund is managed by an
affiliate of the plan's recordkeeper should not be relevant to the
fiduciary's analysis. If an investment fund compares favorably
to other available investment funds in terms of expected risk,
performance and fees, then the fact that the fund is managed by
an affiliate of the recordkeeper should not be viewed negatively.
In fact, it is possible for plan fiduciaries to act prudently while
limiting their consideration of investment funds to only those
funds managed by the recordkeeper's affiliate.
" ... the availability of lower
fees in the context of bundled
arrangements should not be
ignored by plan fiduciaries ... "
Selection and Monitoring of Funds
Importantly, if two investment funds are equal in terms of
expected risk, performance and fees, the fact that one of them is
managed by the recordkeeper's affiliate and will allow the plan to
receive recordkeeping services at a lower fee should be a positive
in favor of selecting that fund for inclusion in the plan.
As with all investment funds included in the plan's investment
lineup, any that are managed by the recordkeeper's affiliates
must be prudently monitored by the plan fiduciaries. If necessary,
fiduciaries must consider removing an affiliate's fund even
if doing so could result in the plan paying higher recordkeeping
fees. In this respect, recordkeepers often include provisions within
their contracts that would allow the recordkeeper to renegotiate
the fee if its investment funds are removed from the lineup.
While the connection between recordkeeping fees and investment
fund(s) may complicate plan fiduciaries' consideration of a
prudent course of action, we are not aware of any guidance that
would support a decision to forgo a lower recordkeeping fee based
on the fiduciaries' aversion to complexity. At a minimum, it could
be beneficial to elect to receive the lower fee until such time-
which may never occur-as the fiduciary decides to remove an
investment fund managed by the recordkeeper's affiliate.
Stephen Saxon is a partner with Groom Law Group,
Chartered, and George Sepsakos is a principal with Groom.
Offices for Groom are in Washington, D.C.
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