With an ever-increasing number of private-sector retirement plan participants relying on automatic enrollment and the investment choices their employers select, the best way for plan sponsors to help these workers achieve a secure retirement is to choose and manage their default options well, a new survey suggests.
The defined contribution investments unit of money manager AllianceBernstein recently released the results of its eighth biannual poll of plan participants and sponsors, conducted in November 2011. The report, “Assessing the State of Defined Contribution Plans Today: Inside the Minds of Plan Participants and Sponsors,” shows that just half of the national sample of 1,018 plan sponsor respondents are relying on target-date funds, also known as life cycle funds, as their qualified default investment alternative.
The U.S Department of Labor has designated three diversified, all-in-one plans, including TDFs, as safe-harbor protection from fiduciary liability when used as default options. (The other two are target-risk funds or model portfolios such as a balanced fund and an investment-management service that allocates a participant’s assets among the plan’s alternatives based on the participant’s age, target retirement date or life expectancy.) DOL also lets plans use stable-value or money-market funds as a temporary QDIA, but only for the first 120 days after an employee begins contributing.
TDFs have proven both popular and effective at maximizing participants’ savings during their working years because their risk factors become more limited as the saver nears retirement. Participants report high satisfaction with their results, even amid volatile markets. With automatic enrollment and automatic escalation in place to increase plans’ participation rate and the level of savings, plan sponsors’ choice of default becomes more significant. Many participants who are auto-enrolled in a retirement plan let the company make their investment choices for them because they are not comfortable with investing.
For sponsors that didn’t report offering a TDF as their default option, 13 percent in the AllianceBernstein survey said they used a balanced fund, which is another acceptable QDIA. But 42 percent, a proportion of plan sponsors called “alarming” by AllianceBernstein, are still using a stable-value/money-market fund, despite its time-limited, temporary status as a QDIA and its equally limited ability to generate growth potential. And 34 percent of sponsors said they have no default option at this time.
The report said that it may also be possible that some plan sponsors in this segment don’t recognize the distinction between a qualified default and any default investment. But with demands on plan fiduciaries increasing almost daily, ”it may be a good time for plan sponsors to revisit whether they have a default option or not — and whether that default option provides safe-harbor protection,” the investment firm said.
The survey’s plan sponsor respondents represented all plan sizes: 207 were from plans with less than $1 million in assets, 608 from plans of $1 million to $249.9 million and 203 from plans comprising $250 or more in assets.
Finding out More
See ¶111 and Figures 111-E through 111-H in The 401(k) Handbook for more detailed information on QDIA standards and DOL’s TDF definition.
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