Open-architecture defined contribution programs are gaining momentum among 401(k) plans with less than $10 million. Those plans historically have preferred the bundled group annuity programs, but concern over transparency and fees has started to change that, said John Mott, senior v.p., at Smith Barney‘s Corporate Client Group. “With an open-architecture platform you can see the revenue sharing fees,” he said. “It’s not so much that the third-party administrators are getting savvier.”
The trend is also being fueled by falling recordkeeping fees and the widespread deployment of special retirement share class pricing schemes, said Frank Bruno, senior national sales director at TruSource, a Union Bank of California subsidiary that offers recordkeeping services.
Retirement shares make it easier to establish smaller open-architecture plans by offering lower minimum investments and calculating both revenue sharing and sub-transfer agency expenses in basis points instead of hard dollar amounts, Bruno said. “In the past you could not buy a retirement share class unless the plan had a certain amount of assets,” Bruno said. “It was also hard to calculate if you were making money in that marketplace when one company paid $10 per head and another paid a hard-dollar fee.”
The changing market conditions favoring unbundled plans are creating new opportunities to compete with insurance company group annuity 401(k) providers, said Steven Sansone of Kravitz Davis Sansone, an Encino, Calif.-based consultant and TPA. “Everything the insurance company participant pays for has been coming down. It used to cost $150 per participant for recordkeeping fees and now those fees are down to $75,” he said.
Cost savings in unbundled plans comes mainly from access to low-cost investments. They also comes from a growing practice of recordkeeping firms allocating mutual funds’ revenue sharing expenses toward overall plan costs, Sansone said. The combined savings in open-architecture 401(k) plans have undercut some group annuity alternatives by more than 25%. “What open architecture does is take the pricing lever, which is firmly ensconced in the hands of the insurance companies, and moves it to the hands of the plan sponsor,” he said.
Although open-architecture is usually the more transparent route, it does not always guarantee lower overall expenses. “The question is whether an open-architecture platform is cheaper than going with a group annuity contract. Sometimes it is and sometimes it’s not,” Bruno said. But the transparency makes the expense more palatable.