Upgrading Non-Profit Retirement Plans: Upgrading IAC Plans to Open Architecture (Part 3 of 3)

This is the last post in this series on how academic and non-profit institutions can upgrade outdated retirement plans, based on individual annuity contract (IACs), into a modern solution that meets the needs of today’s talent marketplace and fiduciary requirements.

The first post noted the deficiencies of IAC plans, including fiduciary risk, high costs, inefficient administrative processes, limited investment choices, advisory and educational services. The second post examined how working with a qualified investment advisor could help remedy these issues, by upgrading these plans to fit current best practices, regulations and employer/employee needs.

Some plan sponsors, however, are not content to give their IAC plan a “tune-up,” but want to trade in their plan for a plan design that is more in line with the type of plan offered by for profit companies as well as larger non-for-profit organizations – an “open architecture” platform – offering more diverse investments, potentially lower costs, enhanced service support, and greater fiduciary protection.

There are two routes that institutions can take to migrate to an open architecture plan.

1. Upgrade with your Current Provider

Your institution may consider moving from an IAC plan to an open architecture platform with your current provider, if such an option is available. For example, many academic and non-profit sponsors work with TIAA, which offers an open architecture platform.

Besides offering participants a wider universe of investment options, a switch to open architecture may provide other advantages:

• An overall reduction in plan costs:
  • Employers are only paying for the services they receive and not subsidizing other, less profitable plans to the provider.
  • IAC plan costs typically include revenue sharing and broker commissions that can be stripped out in an open architecture environment. These underlying investment costs are reduced because of a shift to institutional pricing from retail pricing.
• Open architecture typically will simplify plan administration. As part of the process of working with a qualified advisor, upgrading to an open architecture platform would include moving to only one plan document and one Form 5500, which also contributes to cost savings.

Although a move to an open architecture platform can have many benefits, this doesn’t necessarily solve the key problem of these IAC plans: employees are not invested appropriately. They tend to chase returns, are not adequately diversified across asset classes, and invest too aggressively or conservatively. A successful retirement plan should be measured by employee satisfaction which is driven by employees meeting their retirement goals. Many service providers rely on internet tools that employees don’t use. How can they meet their goals when they aren’t using the tools and resources at their disposal?

A retirement plan advisor must do more than help the plan sponsor choose the right investment options in their plan. The advisor should educate staff and help them with investment decisions that satisfy their retirement goals and at their appropriate level of risk.

In addition, if the plan sponsor upgrades to an open architecture platform while working with a registered investment advisor (RIA), this should result in increased fiduciary protection as the RIA will provide either partial 3(21) or full 3(38) fiduciary protection.

2. Move to an Independent Open Architecture Platform

You may prefer to move away from your current IAC platform and provider, and adopt a new group retirement plan developed with the advice of an RIA. In addition to getting a fresh perspective on your employees’ needs and investment options, this approach offers the following enhancements:

• Investment and recordkeeping cost savings can be substantial as compared with the costs of a typical insurance company-sponsored annuity or group platform.
• A higher level of operational and service support typically will be available from a dedicated representative, versus a toll-free call center.
• The potential for a bundled approach allows for a turnkey, streamlined administrative process. The plan sponsor has the ability to have the recordkeeper perform third party administration services.
• Additional ERISA 3(16) operational fiduciary protection from the plan administrator/custodian.

The shift will require plan participant education and administrative assistance to transition the plan. That said, the assistance of a professional investment advisor can greatly improve your institution’s plan design, overall operations, and benefits to plan participants.

To discuss how MV Financial can help your organization with its TIAA retirement plan, please contact Andrea Kessler at (301) 656-6545 or akessler@mvfinancial.com.