Disadvantages of Multiple Retirement-Plan Vendors
Wendy J. Dominguez
2006 - IRC section 403(b) plans—retirement plans that
can be sponsored by state and local governments for public
school and other government employees, as well as by organizations
exempt from income taxation under IRC section 501(c)(3)—seem
to be the last area in which multiple retirement-plan vendors
are prevalent. Many entities sponsoring section 403(b) plans
have taken a hands-off approach, allowing almost any vendor
that offers 403(b) plans to offer products to their employees.
As a result of this lack of control and coordination, plan
participants have received substandard services and high-cost
products, and the entity has often been left coordinating
payroll deductions to 15, 20, 30, or even as many as 60 different
403(b) vendors. In addition, most employers would have difficulty
arguing that they are fulfilling their fiduciary duty.
environment is certainly not good for employees. In a multiple-vendor
environment, participants lose all of the economies of scale
that come with a consolidated plan–level account.
Retirement plans with several millions of dollars are more
visible to the institutional marketplace. With this visibility
come increased services and reduced costs. Participants
can easily save 1% per year in fees by moving from a high-cost
“retail” solution to an institutional solution.
For just one participant saving $5,000 per year for 25 years,
a 1% fee savings equals nearly $60,000.
to employees can also be improved by a single-vendor environment.
Meetings with employees become less focused on which company
is better (or has a better salesperson or has the better
food at its meetings), and become more focused on educating
employees about which investment vehicles will meet their
goals. This change in focus is significant. The rumors and
casual conversations about which vendor is cheapest, which
has the best investment products, and which has the best
information will become a thing of the past. They are replaced
with an environment where employees feel comfortable that
they are getting great service and great pricing, and where
they can focus on achieving their retirement goals.
benefits to the employer of using a single provider are
also significant, the most important being increased fiduciary
protection. Many entities mistakenly believe that applying
a hands-off approach absolves them of any fiduciary liability.
Benefits attorney Fred Reish and Bruce Ashton, writing in
“Fiduciary Rules Applicable to ‘(b)’ Plans,”
in the Journal of Pension Benefits (January 2005),
403(b) plans and government 457(b) and 403(b) plans are
also subject to legal requirements, just not ERISA’s.
Instead, they are subject to the laws of the states in
which the plans are established. Many
of the state fiduciary laws are based on principles similar
to those underlying ERISA, such as modern portfolio theory,
the prudent man rule, and the use of generally accepted
investment principles, and a number of state statutes
use language that is virtually identical to the provisions
Uniform Prudent Investor Act, enacted in the vast majority
of states (although not New York), spells out sponsoring
entities’ fiduciary duty to select, monitor, and prudently
review the performance of plan vendors and service providers.
Using multiple vendors introduces issues surrounding services
and fees that make fulfilling this duty nearly impossible.
J. Dominguez, MBA, is a principal at Innovest Portfolio
Solutions LLC, Denver, Colo.