Plan Architecture

Open architecture refers to a type of retirement plan recordkeeping system that is investment provider agnostic. A true open architecture system allows access to what at last count was about 10,000 different mutual funds (there are actually about 61,000 funds in existence if you count all the different share classes) so that employers /plan sponsors are free to select the best investment options for their plan without regard to whose name is on the door.

Largely because open architecture is a good idea, competitive forces are pretty much requiring plan service providers to move toward the open model. Be careful though – many so called open architecture products are far from truly open. Under the guise of providing fiduciary protection or some other benefit to plan fiduciaries some of the “open” platform’s ultimate “investment” related screen is whether a particular fund company is willing to pay to be on the platform. While there are some practical and probably acceptable reasons to consider the economics in the fund selection process, performance and manager talent should figure into the equation well above financial considerations.

Another pseudo open platform characteristic is the requirement to include a minimum number of proprietary investments in the asset mix or offering price breaks to select proprietary investment options. Many of the better performing mutual funds rarely advertise. They attract money because they have provided good returns. Many times these managers turn away new investors if the fund becomes too large to manage effectively. The point being they do not need to apply pressure to be included in that plan investment list.

Requiring a minimum number of proprietary funds implies that the performance of the funds does not provide adequate incentive to attract participant investment on their own merit. Is this the best way to select plan investments? If you believe that all mutual funds are pretty much alike then maybe it doesn’t matter. Remember that something in the area of 80% of active managers fail to consistently outperform a comparative index over time. But that leaves 20% that do add investment value. Chances are those proprietary investments being forced on the plan fall in the first category. Open architecture makes finding the top 20% more likely. At least it gives investors a better chance of doing so.

Subject Reference Information