What is an Open Architecture 401(k)

Many 401(k) providers use terms such as “open architecture 401(k)” and “fee disclosure” in their marketing efforts, but what do those terms really mean? Instead of limiting a plan to a specific list of funds, a true open architecture 401(k) format allows plans to select investments from hundreds of mutual fund families and exchange traded funds (ETFs) without impacting the provider’s fees to the plan. This design allows plan sponsors and plan designated investment advisors to fully customize their fund lineups based on the needs of their participants.

Fee disclosure, also known as “fee transparency” occurs when the 401(k) provider ensures that the plan sponsor and plan designated investment advisor can see exactly what they are paying for within the plan. With “full fee transparency,” all fees (, 12(b)1 fees, sub-transfer agency fees etc.), in addition to provider fees, are fully disclosed and explained to the plan sponsor and the plan designated investment advisor.

Full fee transparency is important because while many 401(k) plan providers allow plans to customize their fund lineups, some providers alter the fees they charge based on the funds chosen for a particular retirement plan or reduce the amount of revenue sharing passed through to the plan. (Revenue sharing can be defined as fees paid by the mutual fund companies to service providers for performing recordkeeping services and/or sub-transfer agency services to retirement plans.) These incidentals greatly influence the bottom line of a participant or plan balance. Examples of these fees or limitations include:

*Charging additional fees if the plan chooses funds that that are outside of the 401(k) provider’s standard group of funds.

*Varying fees charged to the plan based on revenue-sharing arrangements between the 401(k) provider, third party administrator and fund families.

*Limiting the selection of investments to a list of funds that pay the provider a certain amount of revenue share

*Requiring that plans include a specific number funds that are sponsored by the provider

As a fiduciary, plan sponsors or the plan designated investment advisor must act solely in the interest of the participants with the purpose of providing benefit to them. Therefore, it is important that the plan sponsor and the plan designated investment advisor understand all of the fees charged to the plan and its participants.

In the past, providers had the option to wrap these fees in with plan costs, making the fees difficult to find or understand. In January 2012, the Department of Labor will implement Rule 408(b)(2) which requires that covered 401(k) providers fully disclose all fees to plans.

At the same time, the DOL will implement a participant disclosure rule requiring covered plans to disclose all investment related fee information to its participants. These regulations will help both the plan and its participants become fully aware of what they are paying in their retirement plans.

A true open architecture 401(k) format will allow the plan to select from nearly all registered mutual funds or ETFs without seeing their plan fees adjusted.