March 31, 2011
--- The answer to this question will vary from adviser to adviser, but no matter whom you ask, it is hardly ever a matter of “yes” or “no.” ---
At PLANADVISER’s Top 100 Retirement Plan Advisers seminar in New York City last week, Ken Rogers, founder and president of Rogers Financial, and Philip Steele, president and CEO of Pension Architects, discussed the pros and cons of using an open architecture plan design. But before a pro and con list could be thoroughly understood, a clearer idea of what it involves was required.
What is open architecture?
Rogers helped shed some light on what open architecture involves; it is not just being able to add non-proprietary funds to a plan's lineup. The recordkeeper, investment manager(s), and custodian/directed trustee are all separate entities. The recordkeeper has the ability to trade virtually any mutual fund or exchange-traded fund (ETF), and has a stable of custodians/trustees from which to select. There are no proprietary investment requirements. Fees for services are fully disclosed, and offset by any revenue sharing provided by investment company (sub-TAs or 12-b1 fees for instance).
It is critical to realize that open architecture is not right for every plan sponsor. Before recommending open architecture to a client, there are a few questions to weigh, said Rogers. How important is flexibility to the client? How important are total plan fees and fee transparency? And how sophisticated are the participants? It’s important to know these things because open architecture might require that a sponsor include funds on a menu that will produce a certain amount of revenue to offset recordkeeping
fees. And although decision-makers of the plan might think flexibility is important, participant behavior might prove otherwise.