An Open Architecture 401k Plan

An Open Architecture 401k plan allows an employer to change any component of the plan – the third-party plan administrator, the record keeper, the registered investment adviser – without moving the plan itself. Many employers offer bundled 401k products to their employees such as those from a mutual fund or insurance companies.  However, if at some point the employer is not satisfied with any component of the plan, it typically needs to physically move plan assets and start all over again by selling them and then repurchasing them someplace else because the individual plan components cannot be unbundled.

Positives of an open architecture 401k plan

Proponents of open architecture claim that their approach allows a provider to search for the best fund managers, without relying on a limited number of in-house investment managers. This enables finding better returns and more diversification. This is coupled with their claim that closed platforms tend to increase the risks of conflict-of-interest and enable the fund company to bulk up on certain asset categories to raise profits. Plan participants could face a sizable amount of single-firm risk, especially if participants put all of their retirement assets in a single target-date fund. 

Negatives of an open architecture 401k plan

On the flip side, on-boarding multiple outside asset managers can be difficult, time-consuming and expensive in an open architecture scenario. Not only does the investment firm incur additional expenses in researching and negotiating with outside funds to offer to their clients, but these expenses are eventually borne by the ultimate client through higher fees. Also, from a regulatory standpoint, open architecture has no regulation around it. This makes the structure open to exploitation. For instance, when an investment firm provides an open architecture platform where investors have options to select outside funds from other institutions, the vendor typically increases the fees on the outside funds to make their own in-house funds appear more lucrative. Essentially, the firm is redirecting investments into their own proprietary funds while making it appear as if they are offering an open platform where all funds are treated equally.  This is often referred to as ‘guided architecture.’ Such unscrupulous behavior has also resulted in lawsuits but continues to prevail nonetheless.   

Conclusion: 401k open architecture

Investors, therefore, need to ask more questions about the investment plans they are contributing to. This includes not just plans structured by the bank or mutual fund company you have an account with, but also retirement plans offered at your workplace. Where are your contributions going? What investment funds are your matching contributions going into? What investment companies are your fees going to? Do you have a say in selecting which funds to invest in? If so, can you choose third-party investment funds offered on an open platform? Or are you limited to just the in-house vehicles of a closed platform?

Remember that while open platforms do give you more choices, they may come with higher fees. And while closed platforms may be cheaper, they may not give you enough to choose from to be properly diversified.

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