Defining Open Architecture & Fee Transparency

By Bob Blair, Chief Executive Officer, Retirement Alliance

Most employers say they want 401(k) plans that offer both open architecture and fee transparency. Who wouldn’t? Simply choose the industry’s best funds and know how much you are paying for services. It’s easy to see the universal appeal, yet most plan providers offer neither open architecture nor fee transparency. Where is the disconnect?

I believe the answer lies in the marketing of various 401(k) products that indiscriminately use the terms open architecture and fee transparency.

Definitions Can Be Open to Interpretation

Let’s take open architecture first. Who wouldn’t want the industry’s best funds in their 401(k) plan? Suppose you are a plan sponsor reviewing a proposed plan that has a single fund family’s best funds—is that open architecture? Most of us would say no. Yet Vanguard is a large player in the 401(k) marketplace.

Now suppose you are reviewing a proposed plan that has a single fund family’s best funds, along with a few other fund families’ funds that paid that single fund family to participate in its program. Are you ready to settle for less than open architecture yet? Some plan sponsors would be tempted. In fact Fidelity, which is structured exactly like this program, is also a large player in the 401(k) marketplace.

Suppose you are now reviewing a multi-fund family program made up of funds that the plan provider handpicked from funds that supply that provider with revenue—and that revenue was not disclosed to anyone. Interested in less than open architecture now? Unfortunately, some plan sponsors do settle for an insurance product like Nationwide’s Best of America 401(k) program, which garners a lot of assets.

The truth of the matter is that in spite of all the marketing trying to make the above products open architecture, any proprietary 401(k) program is by definition not open architecture.

Now let’s discuss fee transparency. If you are going to subscribe to having open architecture in your 401(k) plan, where are you going to get the industry’s best funds? Try a custodian instead of a proprietary program. Some of the largest custodians in the marketplace include Charles Schwab, Fidelity Investments, Matrix Settlement & Clearance Services, TD Ameritrade and Wilmington Trust Company; each having both the largest number of assets and the largest number of funds in their individual programs. (Note that Fidelity Investments is the independent arm of Fidelity; it is not the Fidelity mutual fund program mentioned in the paragraph above.)  Of course there are other options, but in these days of financial turbulence, a household name handling and insuring your 401(k)’s assets while providing a true open architecture program is really a great way to start this New Year or any other.

Fiduciary Responsibility 

As you have heard many times before, by definition, Plan Sponsors are fiduciaries, and one of their duties is to monitor and understand the cost of their 401(k) programs. In that light, even if a Plan Sponsor were not interested in fee transparency, it would be obligated to at least peer behind the curtain. What curtain you might wonder? Just like in the recent Bernie Madoff scandal, things are not always as they appear. Mr. Madoff was able to get away with his Ponzi scheme because he printed his own client statements; his clients did not have the benefit of a custodian’s statement tied to their Madoff statement.

Ponzi schemes are fraudulent; units on the other hand, are not. Yet the insurance provider alone decides what a unit is worth—just like Mr. Madoff decided what his clients’ statements were worth. The biggest impediment to fee transparency in 401(k) plans is the insurance industry’s use of units as a measure of how much a plan or participant owns of a certain fund. Only the insurance company can account for what a unit is worth; given the proprietary nature of the unit, it is very difficult to pull back this curtain.

Shares and Share Classes

While units are a proprietary measuring stick, shares are not.  The standard measure of a mutual fund is a share. Every night we all have access to see if the share price has gone up or down for any particular fund.

Not quite as offensive as the unit is the share class. Mutual funds have shares but all shares are not equal. There have always been A, B and C shares, and more recently, R shares—not just one R share but sometimes five or six different R shares. Share classes are just a way for the industry to reward the people who brought them the business—no real harm, as long as it is disclosed to the plan sponsor. However, numerous lawsuits have been brought regarding the misuse of share classes because its use was never disclosed to the plan sponsor or participants.

Transparency and Recordkeeping

In still another instance of abuse that is very common, why is a plan provider discounting its recordkeeping services to $0 at the time of sale, yet when the plan assets grow, no additional consideration is given to the increased plan revenue? Again numerous lawsuits have now been brought regarding “free plans” that don’t credit this “excess” asset revenue back to the plan or its participants.

If you subscribe to fee transparency—if you believe a Plan Sponsor should at least have a rudimentary knowledge of the cost of providing a 401(k) to his or her employees—then you should have an ERISA or fee reimbursement account attached to your 401(k) plan for capturing fund revenue and accounting for any expenses.  Smaller plans (under $1,000,000 in plan assets) might have trouble establishing such accounts but small plans grow and sooner or later should establish an ERISA or fee reimbursement account when they can.

Today, there is no reason for Plan Sponsors not to provide their Participants with plans that give great investments at a reasonable cost.  Especially regarding fees, Plan Sponsors need to look behind the curtain and see what in fact Participants are paying for their 401(k) plans. Just because the Plan Sponsor is getting the plan for free does not mean it is a worthwhile retirement plan for the Participants.

Retirement Alliance does no business with proprietary fund companies or insurance companies and has not since its inception in 1994. You can tell a lot about our company by looking at whom we do business with: The five largest custodians in the 401(k) marketplace who each provide open architecture and fee transparency for our mutual clients. If you would like to learn more about this topic or have any questions about your plan or our services, please contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .