More defined contribution plans are moving to an open-architecture investment lineup strategy, seeking greater flexibility and less reliance on proprietary products offered by their record keepers.
Consultants and ERISA attorneys say the strategic shift has many causes — a quest for greater diversification, tougher negotiating over fees and services, federal fee transparency regulations and fiduciary breach lawsuits.
This phenomenon goes by many names — open vs. closed architecture, bundled vs. unbundled plans or proprietary vs. non-proprietary products. But the theme is the same: reducing exposure to a single or dominant source of investment options.
Unbundling “offers a clear articulation of fees,” which is the primary reason Willis Towers Watson PLC recommends it, said Robyn Credico, the Arlington, Va.-based defined contribution practice leader.
Sixty-three percent of Willis Towers Watson DC plan clients had unbundled arrangements last year, up from 52% in 2014, according to an internal survey of 105 clients.
The company defines a bundled arrangement as investments that are wholly or primarily those of a plan's record keeper. In bundled plans, administrative fees are typically paid via revenue sharing. Willis Towers Watson has been preaching the unbundled sermon for many years, “but it didn't really resonate with clients until we saw all of those lawsuits,” said Ms. Credico, referring to excessive-fee lawsuits filed against plans in the previous decade.
Clients also became more responsive to unbundling after the Department of Labor enacted fee-transparency rules for record keepers and sponsors in 2012, she said.
Annual surveys by Callan Associates Inc. show a rising interest among DC executives for a fully unbundled plan design — 44% last year, reflecting a steady annual increase from 29.9% in 2011. “Fully unbundled” means the record keeper and trustee are independent and none of the investments is managed by the record keeper.
Last year, 14.2% of plans in the survey had fully bundled strategies. The rate has vacillated in recent years, reaching a high of 22.7% in 2011. “Fully bundled” means the record keeper and trustee are the same, and all investments are managed by the record keeper.
Partially bundled plans accounted for 39% of last year's Callan survey, but the number has bounced around from year to year - with a high of 54.1% in 2012. In these plans, the record keeper and trustee are the same, but some investments aren't managed by the record keeper.
“It's very rare” for a Callan client to be fully bundled, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader, adding that a majority of respondents in Callan's surveys aren't clients. “We always talk to sponsors about separating record keeping and investments.”