From the December-January 2008 issue of Treasury & Risk magazine

A Better Way to Default

Automatic enrollment is on a tear. After the federal government gave its blessing through the Pension Protection Act (PPA), a steadily mounting number of employers are signing up new employees automatically into 401(k)s to help them make sure they put enough away for retirement. But this also raises the fiduciary stakes for plan sponsors since most default options--the investments that participants are placed in when they fail to select one--have tended to offer only the lowest of yields, albeit accompanied by the smallest of risks.

The PPA took that into account too, by providing a working definition of qualified default investment alternatives, or QDIAs. And in November
the Department of Labor identified three types of investment funds that qualify under the PPA as safe harbors: target-date funds, balanced funds and professionally managed accounts.

So now it is up to plan sponsors to make sure their plans also make the grade, and not surprisingly employers and vendors are pushing forward to find or create options that will make employees happy that their companies signed them up."What's encouraging is that companies realize that simply automatically enrolling employees into the 401(k) plan will not get workers where they need to be in terms of retirement savings," says Pamela Hess, director of retirement research at Hewitt Associates. "They are shifting their priorities from basic enrollment to quality enrollment...by picking more appropriate default rates."

Initially, plan sponsors will move "out of super-stable value and money market funds into balanced funds that have a mixture of stocks and bonds--and more potential for growth," predicts Matt Smith, managing director of retirement services at Russell Investments.

But if you are not satisfied with what's out there, fear not, providers are starting to come forward with new funds specifically designed as QDIAs with an edge--meaning on the lower side of the risk continuum but with enough exposure to equities to bring some meaningful long-term returns.

"You are going to continue to see innovation with respect to products, and that's going to result in more choices, more sophisticated products, lower costs and new features, such as addressing longevity risk and inflation risk," says Phil Suess, a principal and defined contribution (DC) segment leader at Mercer Investment Consulting. "And you likely will see more and more of these products providing some sort of guarantees."

Among those out of the gate first: Barclays Global Investors (BGI) plans to offer SponsorMatch, scheduled to be available early next year. SponsorMatch bundles three portfolios into a single asset management strategy. The three portfolios being an annuity portfolio to provide an income stream, a beta portfolio to capture market returns and an institutional alpha portfolio for enhanced return potential. "It is a variation of a traditional defined contribution (DC) target maturity date fund in that it matches the participant's retirement year, but because it incorporates an annuity, it behaves more like a defined benefit (DB) plan," says Kristi Mitchem, head of BGI?s defined contribution group. "Plan sponsors can, in their capacity as fiduciary, provide a better retirement outcome for participants by directing the company match into a solution with DB like features.

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