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Open Architecture Gaining Traction in Larger DC Plans

According to reports by large DC plan consultants, the use of proprietary funds is waning, driven by lawsuits, diversification, more transparency and the desire for lower cost funds.

Yet the data are showing a bit of a different story. For example:


  • Willis reports that 63% of clients unbundled record keeping, trust services and investments in 2015, up from 52% in 2014.

  • According to Callan, 14.2% of its clients were fully bundled in 2015, down from 22.7% in 2011 — and just 39% were partially bundled last year, down from 54.1% three years prior.


While there’s nothing improper about using proprietary funds, they may require a higher level of due diligence, especially when it comes to TDFs. Some experts are recommending that plans conduct a TDF RFP before they even start searching for a record keeper.

But according to an Investment Company Institute/Brightscope study, 67% of DC plans offered the prevailing record keeper’s proprietary investments as recently as 2013. Not larger plans, right? Wrong! 63% of DC plans with more than $1 billion offered proprietary funds of their record keeper, as did 79% of plans with $250-$500 million, accounting for 38.6% of plan assets.

One reason might be that more assets are going into qualified default investment alternatives (QDIAs), with TDFs a common QDIA choice. Also, many larger record keepers like Vanguard, Fidelity and T Rowe Price are offering their proprietary TDFs.

While there’s nothing wrong with offering a record keeper’s prop funds, according to a 2014 Pension Research Council study, only 13.7% of poorly performing proprietary funds were replaced by DC plans, compared to 25% for others.

Will this trend move down market? Perhaps. But less sophisticated advisors and plan sponsors might be the last to make the move away from proprietary funds — which may give rise to more issues, since they are also the least likely to perform prudent due diligence. Record keeper fees keep dropping, which makes the use of proprietary funds, whether TDFs or stable value funds, a key to these providers’ survival.

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