Investment trends in the $4.5 Trillion Defined Contribution (DC) market are stretching the definition of an ‘open architecture’ investment platform. Historically, open architecture meant you or your partner offered a significant number of mutual funds from a variety of managers. While mutual funds still hold a significant amount of DC assets, alternative investments are taking hold and growing. Recent research from Celent predicts growth in non-mutual fund options, including Collective investment trusts, Exchange Traded Funds (ETFs), separate accounts and retirement income products. If an investment platform wants to remain truly ‘open,’ it will need to consider extending its mutual fund platforms to include these alternatives and the technology and operational challenges that go with them.
Adding ETFs requires retirement plan recordkeeping and trading systems to manage trading and settlement differences between mutual funds and ETF securities. Collective investment trusts (CITs) operate somewhat similarly to mutual funds, but are under a different set of rules and requirements. Separate accounts using third-party money managers open up the potential for thousands of investment model options for investors. Retirement income is garnering a lot of attention as investing continues a shift from accumulation to de-cumulation, and a number of options are being offered into DC plans incorporating annuities, guaranteed minimum withdrawal or income benefits (GMWB/GMIB), investment guarantees and other non-insurance solutions with investment based downside protection.
Offering any of these non-mutual fund options can create system challenges for recordkeepers and third-party plan providers, particularly when considering ever-changing due diligence, fee transparency and fiduciary requirements needed across all investments.
As DC providers expand their offerings, it is critical the underlying systems accommodate the new solutions effectively. Platform questions for their Information Technology (IT) groups and partners include:
- Is there adherence and commitment to data communication standards and protocols like NSCC, SWIFT, FIX and SPARK (retirement income) to speed implementations and grow into new markets quickly?
- Do you have a broad and expanding partner network linking to new products and data sources required for analysis, due diligence and compliance needs?
- Can your ancillary services support the new options to help ensure efficient and compliant end-to-end processes for trading, reconciliation, revenue management, payments, fee transparency reporting and custody?
Is your platform ready for (wide) open investment architecture?
Participant directed investments: good, bad, indifferent
