Open-Architecture Investment Platforms

Offer a diverse range of investments to suit any retirement strategy

In the days of guided architecture (or focused investment platforms), employees often had to choose from an investment menu containing proprietary funds to build their retirement strategies. Investment platforms were limited, and fund lineups were therefore more constrained.

In the 21^st century, open-architecture investment platforms can help employees avoid investment restrictions.

Developed to accommodate a broad range of investment needs, platforms today seek to ensure that financial professionals and employers can construct plan investment menus that are consistent with their Investment Policy Statements.

Industry trends and statistics show that these platforms are now the standard for modern retirement plans, as they have made substantial gains in popularity and usage over the past 10 years.

According to Cerulli Associates, the shift to open-architecture investment platforms is evidenced by the growth of defined contribution investment-only assets and the diminished use of proprietary-only investment products: 75% of 401(k) assets were addressable¹ for investment-only managers in 2011, compared with 50% in 2003.²

Furthermore, Ernst & Young notes that a majority (79%) of wealth management firms plan to add open-architecture investment platforms to their overall client and product strategies within the next two to five years.³

Open-architecture investment platforms are favored because they can support any combination of proprietary and non-proprietary strategies, along with both traditional and non-traditional investment options that include:

• mutual funds
• ETFs
• stable value funds
• collective trust funds
• unitized company stock
• alternative investments

These platforms are also flexible enough to adapt to new developments—such as target date funds and model portfolio solutions—that can address distinctly different employee investment preferences.

A 21^st century retirement plan allows employees to select from a wide range of fund families and investment options in order to choose the best investments for their retirement needs. This makes open-architecture investment platforms an essential retirement plan tool for both financial professionals and employers.

1Addressable assets are defined by Cerulli Associates as those in which the plan is not restricted to using a recordkeeper’s proprietary investment product.

2Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.

3Source: Ernst & Young 2011 US Wealth Management Study: A Focus on Product and Client Trends.

Automatic Enrollment

Put employees on the path to retirement while increasing participation rates

Since the introduction of the employer-sponsored retirement plan, employees have been encouraged to participate in order to prepare for the future.

In the past, advisors and employers relied on enrollment meetings to help employees get involved in their plans. These gatherings could often be tedious, complicated, time-consuming, and expensive.

Unsurprisingly, enrollment meetings didn’t always inspire employees to sign up for their plans, select the proper investments, or choose suitable deferral rates. As a result, they became a decidedly 20^th century concept desperately in need of updating.

Recent times have seen the development of such an update in automatic enrollment.

The benefits of automatic enrollment are many. For employers, it can help with avoiding compliance testing issues in addition to increasing participation. It also allows them to replace meetings about enrollment procedures with sessions that focus on financial and investment education.

For employees, it simplifies the enrollment process and helps them save for a more secure retirement. Employees also incur no additional costs, and they can opt out at any time should their circumstances change. 

Employers can help employees get off to an even better start by setting default deferral percentages at an appropriate rate. In many cases, this means 5% or greater. Recent research has shown that over 80% of employees would contribute 5% of their salary in return for reliable income in retirement.¹

Furthermore, plans that automatically enroll participants at a rate greater than 3% of their salary have a 95% overall participation rate—7% more than those with lower deferral rates.²

Ascensus has found that auto enrollment has proven to be effective, as participation rates among Ascensus plans that adopt our auto enrollment program are almost 10% higher than those in plans that don’t.³

In terms of sparking employee participation, automatic enrollment is a true 21^st century tool that no modern retirement plan should be without.

¹Source: Bank of America Merrill Lynch's 2012 Workplace Benefits Report

²Source: New York Life Retirement Plan Services, June 2012

³As of February 1, 2012.

Are You and Your Clients Taking Advantage of 21st Century Retirement Plan Tools?

The retirement plan landscape is constantly changing.

The employer-sponsored retirement plan—an invention of the 20^th century—has undergone several rounds of legislative, technological, and operational evolution. Yet, it has endured and continues to be as important as ever. At the end of 2012, Americans had $5.1 trillion in employer-sponsored defined-contribution retirement plans, accounting for 9.1% of U.S. household financial assets.¹

For advisors and employers alike, 21^st century changes to employer-sponsored retirement plans have meant keeping up with the latest on multiple fronts—from advances in smartphone technology to changes to fee-disclosure rules. They've also meant smarter options for managing retirement plans.0

Over the next several weeks, Ascensus will examine the benefits of these retirement plan changes via a series of blog posts. Follow along to find out if you and your clients are taking advantage of everything that 21^st century retirement plan tools have to offer.

20th Century Retirement Plan	21st Century Retirement Plan
Depends on enrollers and employee meetings to enroll participants	Uses automatic enrollment plans to automatically enroll eligible employees
Offers a limited number of funds	Uses an open-architecture platform to create investment menus from a wide range of investment options
Needs to perform continual due diligence and research on all investments, even if it’s not a strength	Relies on expert independent research and recommendations for fiduciary protection
Periodically solicits proposals from several providers to ensure that costs are reasonable	Validates value through independent, third-party benchmarking services
Relies on manual deferral increases to boost savings rates among participants	Uses convenient auto-increase feature to automatically increase participants’ savings rates
Allows participants to manually diversify and rebalance their accounts	Works with an advisor to offer automatic rebalancing, models, and target-date funds so participants can balance and diversify based on their personal risk profiles and goals
Focuses on capital preservation	Offers qualified default investment alternatives to help employees get more out of their retirement savings
Lets participants manage their own accounts	Gives participants the option to self-manage accounts or provides access to professional investment management
Provides generic information on benefits of investing to drive participation	Sends targeted participant-specific communication to help employees plan for retirement
Concerned with deferral amount rather than employee goals	Provides goal-oriented savings tools to help participants measure retirement readiness

¹ Source: Retirement Assets Rise 8% in 2012: ICI, www.advisorone.com