Many companies offer their employees bundled 401(k) products from mutual fund or insurance companies, but if the organization is unhappy with any component of the plan, it is forced to physically move the plan’s assets and start over by selling them and then repurchasing them elsewhere because the individual plan components cannot be “unbundled.”
However, an open architecture plan allows employers to change any of the silos of the plan — the registered investment adviser, the third-party administrator, the record keeper — without having to move the plan itself, says Peter Mooney, CEO of Source Companies LLC, a subsidiary of The Ancora Group.
“The strength of open architecture is that you can custom build your plan to meet your needs and those of your work force,” says Mooney. “You can change any of the components of the plan without having to start over.”
Smart Business spoke with Mooney about how open architecture can ensure that you never have to move your plan again.
What are the disadvantages of bundled products?
When you use a bundled product, that plan is not owned by you, the employer. Instead, it is owned by the investment company, which negotiates each of the components and their fees, and then sells them bundled together.
As a result, you are tied to whatever the investment company has negotiated. If you are not happy with some component of the plan, you must sell all the assets, move the entire plan to another investment company and then repurchase the assets. That also requires terminating the relationship with your third-party administrator and setting up a relationship with a new one.
What is changing in the 401(k) industry?
Instead of the insurance or mutual fund company owning the 401(k) plan, companies are moving toward having a direct relationship with a custodian through open architecture. Then if, for whatever reason, you are not happy with an investment, for example, you can just change the investment. The same would be true with your third-party administrator, your record keeper or the performance of your investment adviser. The employer has control and can change out any of those components without ever having to change that core custodial account because your company owns that relationship.
With the recent requirements of full disclosure of 401(k) plan fees and more thorough reporting, there is an increasing trend toward open architecture. People are tired of physically moving their plan from company to company. It is disruptive to employees to have to sell everything and then repurchase it, requiring them to fill out forms and re-elect how their money is being allocated.
Open architecture makes everyone’s lives easier, allowing you to have a direct relationship with the custodian and giving you control over that relationship. You can replace your investment adviser, the third-party administrator or the record keeper, but you do not have to replace the base of what you started with.
Is an employer qualified to make decisions about changing components of the plan?
If your investment adviser is doing his or her job properly, you should be educated enough to make those decisions. There should be checks and balances of what to look for and to make sure that other people are doing their jobs. It sounds like it puts more onus on the employer, but it really does not.
As long as the plan sponsor and the advisor establish a proper investment policy statement, there is no more burden on the employer. In fact, it actually makes their life a lot easier in the long run.
What would you say to an employer who doesn’t want to be involved in those decisions?
Your investment adviser can take a fair amount of the responsibility off of the employer, but ultimately, you are still responsible for the plan. You need to be educated about the issues, and if you do not want to be involved in it at all, I would recommend that you do not offer a retirement plan.
What does a company need to be aware of regarding 401(k) fees?
Previously, many advisers claimed to sell 401(k) plans but were not really in the 401(k) industry. They may have sold two or three plans but were not advising them properly. Fees at that time were very, very high.
Over the years, the industry has consolidated and the surviving organizations that are in the business really understand 401(k) plans and make them their focus. The good ones are trying to drive down fees for employees as well as the employer while educating the trustee on the changes in the industry.
Most important, regarding fees, an employer must understand the value of the services being delivered by each of the service providers to ensure it is getting what it is paying for.
Employers should drill down to find out what each of the fees are. What are the investment adviser fees? What are the third-party administrator fees? What are the record keeper fees? And what are the custodian fees? Those are the biggest areas of fees associated with a 401(k) plan, outside of the expense ratio for mutual funds. What questions should a company be asking to ensure that they have the right 401(k) plan to meet their needs?
The plan sponsor should ask every service provider: How are you going to help my employees meet their retirement needs? What type of education do you provide me and my employees? Do you have a product that can grow with me as my business expands and changes? Can you provide me three references of similar companies to mine in size and industry?
Then make your decision based on what you learn.
Peter Mooney is CEO of Source Companies LLC, a subsidiary of The Ancora Group. He is also a Registered Representative of Safeguard Securities, Inc. (Duly Registered Member FINRA/SIPC and an SEC Registered Investment Advisor). Reach him at (216) 593-5095 or firstname.lastname@example.org.
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