The Trend Toward Open-Architecture for Retirement Plan Sponsors

What is an open-architecture retirement plan platform?

Simply put: an open-architecture retirement plan platform allows participants access to all available registered Mutual Funds, including all low-cost, no-load funds, in all investment categories.

It sounds like the participant would have to be a mutual fund expert to select their 401(k) investments using an open architecture provider?

Not so. What we are saying is that when the business owner or the plan sponsor (usually, with the assistance of the plan’s financial advisor) performs their due diligence and selects the investment line-up for their plan by using an open architecture platform, they can more easily meet their responsibilities by picking the most well-suited funds to offer their employees. Because the open-architecture platform allows the plan sponsors to select from the entire universe of mutual fund management companies, the ongoing job of providing a “best in class”, low cost investment line up for participants and monitoring the plan’s investment performance is much easier within an open-architecture platform. This is in contrast to many of the existing proprietary plan platforms, still commonly used within the industry, which limit the investment choices, and fund share classes, due to the terms of their contracts.

How big of a factor is the type of retirement plan platform plan selected when looking at the plan participant’s investment return?

With just a ½% increase in average annual total return, e.g., 7 ½% vs 7%, a participant contributing $8,000 annually into their 401(k) from age 30 through 65, will earn over $153,000 more in their retirement plan account. If plan sponsors can effectively lower their plan expenses, or increase the investment returns by substituting less expensive or better performing funds, even a small difference in investment performance can have a positive long term impact on the participant’s performance. As we mentioned, by not imposing any restrictions on the investment menu will allow plan sponsors and advisors to meet their ongoing responsibility to provide investments that consistently outperform their benchmarks.

Is it possible to buy individual securities, such as stocks or bonds in my 401(k)?

Yes. Plan sponsors with large workforces, or whose participants are not sophisticated investors, would generally decide on a core menu of professionally managed Mutual Funds (including U.S. stock funds, foreign stock funds, and fixed income/guaranteed funds). However, for companies, whose participants have experience in selecting their own individual securities (usually smaller, professional organizations), access to individual securities can be provided by offering a “self directed brokerage account” in order to accommodate participants who wish to hold individual stocks and bonds. The self directed brokerage account” option is available on the BPAS platform. Sponsors should discuss this option with their financial advisor, and take the time to understand the pros and cons, given their plan’s goals, objectives, and demographics.

Are open architecture platforms only available for 401(k) and other Defined Contribution plan designs?

Open architecture platforms are available to the majority of qualified plan designs. As a matter of fact, we have seen quite an interest from plan sponsors of defined benefit, 457, and other plan sponsors as well. They, too, are concerned about the current economic environment.  When discussing various investment options available to them with the current investment provider, they are surprised to learn they are unable to access many of the best performing mutual funds that they wish to utilize in order to help achieve the plan’s investment objectives. For these reasons, plan sponsors, and financial advisors are now reaching out to us, to discuss the process to convert their plans to an open-architecture platform.

Can you summarize?

Of course – By partnering with an open architecture retirement plan provider such as BPAS, plan sponsors will be free to choose the best performing, lowest cost investments for their employees. They will not be limited by contracts, fee structures, or pre-selected investments and will be better able to meet their plan’s most important goal of helping their employees retire with dignity.