I am a sucker for a deal. As such, I’m an easy target for companies that offer “bundled” products and/or services. I mean, lower prices on items I would otherwise buy a la carte - yes, please! For example, when I buy fast food, I always order a “value meal” that includes a burger, fries and a drink – instead of buying these items individually – to save money. When I shop for cable television service, I purchase a bundle that includes the channels I want and Internet.
However, as a retirement plan fiduciary, I know I must suppress my urge to bundle when shopping for 401k services because of ERISA “self-dealing” rules. These rules obligate 401(k) plan fiduciaries to select service providers based on the best interests of plan participants and not due to any free or discounted services they, or their company, might receive in return for selecting a particular provider.
401(k) service providers that bundle
Investopedia defines bundling as “a marketing strategy that joins products or services together in order to sell them as a single combined unit. Bundling allows the convenient purchase of several products and/or services from one company. The products and services are usually related, but they can also consist of dissimilar products which appeal to one group of customers.”
Lots of companies offer 401(k) services in addition to other corporate services - including banks, insurance companies and payroll firms. Many of these companies will incentivize prospective clients to bundle two or more of these services. In my experience, banks bundle the most aggressively. They incentivize 401(k) plan fiduciaries to select their 401k services by offering lower interest rates on loans, higher interest rates on savings or looser eligibility requirements for services in return.
Bundling sounds pretty good to me. What’s the problem?
Under ERISA, 401(k) fiduciaries have an obligation to act solely in the interest of plan participants, with the exclusive purpose of providing benefits to them. Fiduciaries are prohibited from engaging in self-dealing and must avoid conflicts of interest that could harm their plan. Under a bundling arrangement, it’s possible the plan sponsor benefits at the expense of plan participants.
The Wagner Law Group wrote a very good article regarding the self-dealing issues that can relate to bundling, or “cross-selling” as they referred to it. In this article, they said ERISA Section 406 provides prohibitions against fiduciary self-dealing and that “In accordance with these prohibited transaction rules, a plan sponsor must not use the assets of the plan to benefit itself. In the context of cross-selling, the plan sponsor must not cause the plan (or its participants) to pay for investments or administrative services, if it results in free or discounted services or other personal benefits for the plan sponsors. It should be noted that a violation of ERISA can occur even if the fees and costs borne by the plan or plan participants are commercially reasonable. In this regard, the prohibition against self-dealing is a per se prohibition against the use of plan assets for personal gains, and a violation will result even if plan participants receive valuable services for reasonable compensation and are not demonstrably harmed.”
Plan sponsors should shop for 401(k) services independently from other services
Companies often require many corporate services – banking, insurance, banking, IT, and HR to name a few. While most service providers can be selected based on their benefit to the company alone, 401(k) services must be selected based on their benefit to plan participants. This is a very important way in which 401(k) services are unique from other corporate services.
While bundling 401(k) services with other corporate services can seem like an attractive means of obtaining low cost non-401(k) services, fiduciaries should be sure participants are not harmed or they can expose themselves to personal liability.