Beneficiaries Prep for “Open Architecture”

Terry Flanagan

For pensions and nonprofits, plan sponsors prepare for institutionalization.

Open architecture investment management can mean flexibility. Historically, the most sophisticated institutional investors utilized this method, unconstrained by regulations and parameters of risk.

Today, pensions and non-profits, such as endowments and foundations that qualify as a 403(b) plan, should prepare to jump ship from assuming a retail-oriented distribution model to that of an institution.

“While the 403(b) industry remains highly differentiated based on market segments the overall trend is that the industry is moving from an advisor-sold retail environment to become more institutional,” said Alessandra Hobler, analyst at research provider, Cerulli Associates.

Hobler highlighted that 403(b) plans will be see growth of implementation through mutual funds, a common platform already utilized by private sector, 401(k) plans.

“While currently there are many individual annuity contracts or group variable annuities used, as the industry grows it is likely that the mutual fund use in 403(b) plans will increase,” she said.

Regulations for nonprofit plan sponsors began in 2007, when an increased number of 403(b) plans became subject to ERISA (Employee Retirement Income Security Act) of 1974. Regulations were finalized in 2009, according to Cerulli research.

Thus, endowments and foundations, especially who operate under the 403(b) code have now adopted institutionally oriented.

“Currently the industry remains in a state of transition, however with greater regulatory focus and number of plans subject to ERISA increased attention will be paid to plan specifics such as investment vehicle, investment selection, cost, and open architecture,” Hobler said.

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