Everyone Says They Have It, But Do You Get It?

Understanding Open Investment Architecture

"OPEN INVESTMENT ARCHITECTURE" is getting a lot of exposure in the retirement planning world these days. While most claim to offer it, defining it and its merits can prove to be tricky. In some cases, it means offering all funds that are open to retirement plans. It can also mean offering investments beyond the record keeper’s options after their proprietary requirement is met. Lastly, it can mean offering all outside funds, except the provider’s money market or stable value—usually a requirement when the record keeper also has proprietary funds.

In the wake of all the focus on fee disclosure, and ERISA’s requirement for sponsors to prudently review fees for reasonableness, the concept of open architecture and its true meaning may come up for discussion more frequently. According to the 49^th Annual PSCA Annual Survey, 46.2% of plans with 1-49 employees and 47.8% of plans with 50-199 employees are restricted to investment options managed by their record keeper. In an increasingly technologically sophisticated industry, these numbers seem high given most vendors use systems that can trade outside funds as efficiently as proprietary funds.

To help your clients prudently monitor and select their plan investment options, do the following at your next investment review meeting with plan fiduciaries:

(1) Review investments according to the plan’s investment policy statement (IPS)

(2) Identify all fees and revenue sharing arrangements to understand total plan costs

(3) Ensure that the platform requirements for proprietary funds are well understood

If proprietary funds are performing according to the terms of the IPS then using proprietary funds may not be a concern. If they are not, it may be time to look beyond proprietary investments. It is not prudent to alter the IPS to fit the performance of proprietary funds, but rather find funds that meet established criteria. Depending upon plan size the vendor may surprise you by opening up to one of the broader definitions of “open investment architecture.”

Understanding the true investment opportunities made available by a record keeper can help you guide your clients through a successful, prudent process. Although it is ultimately the sponsor’s choice to limit themselves to proprietary funds, it is an advisor’s responsibility to educate clients on the existence and value of true open investment architecture.

To learn more about how TruSource can help you grow your business contact Frank Bruno, Senior Vice President, at 800-274-8798.

TruSource, Trust Outsourcing Partners is a division of Union Bank of California, N.A.

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