Just as some fashion mavens believe that less is more, so, too, do a growing number of plan sponsors, who in anticipation of new rules from the Department of Labor (DOL), are, advisors say, spending an increasing amount of time trimming down their investment offerings to make their retirement plans more viable and realistic.
"Before, the trend was that the more funds you had on offer, the better it was, but not every fund was right for a 401(k) plan," says David Katz, founder and partner of Rocaton, an advisory firm in Norwalk, Connecticut. "The PPA will potentially change the permissible default options plan sponsors can use for their employees. Right now, the default option for plan participants is the money market, but under the PPA, there will be more flexibility in terms of either risk-based funds or managed accounts, so plan sponsors are looking to get their investment options in line with this eventuality."
Plan sponsors know that by new DOL rules, which are coming out as a result of the Pension Protection Act of 2006, they will soon need to change the default options on their plans, Katz says, and in light of this, it makes sense to change the entire line-up of funds before that time. "The number of funds people are offering is shrinking as plan sponsors are looking to offer choice options that allow investors to invest in diversified portfolios," he says.
In the run-up to expected DOL rules, which were expected out by late June or early July but have yet to be released, having a well-tailored suite of investment options is one of the areas plan sponsors are currently focusing on the most, and if they are not, they would be best served by doing so, says Stacey Hyde, an advisor with Memphis-based First Tennessee. Hyde's firm just took over a plan with about 70 fund offerings, and it promptly cut that number in half, she says, to make more sense of things. "It hasn't been completely decided but the guidance we have received so far says that the default option for 401(k) plans will be qualified funds, so people need to get in line with that," Hyde says.
The steps plan sponsors are taking to cut the fat off their investment offerings is just one example of how focused many are becoming on drilling down to the nitty-gritty details of what needs to be done to make retirement plans more effective, regardless of the law. Plan sponsors are, for example, placing a great deal of emphasis upon nailing down the different fees they are paying and demanding transparency from their providers, Katz says. And many are taking the extra step to spur participants to become more involved with their individual retirement plans by enacting re-enrollment measures. "They're telling people that if they don't re-enroll by a certain date, they will be automatically defaulted to a qualified retirement plan, which means that if people want a more conservative option, they will have to do the work and figure it out for themselves," he says. "This is good because many people who don't do anything will actually remain in a better, less conservative fund."
But even if it seems that plan sponsors are now shaking things up, professionals like Darwin Abrahamson, CEO of Portland, Oregon-based Invest n Retire, believe there is still a lot of ground to be covered. Rather than aiming for the kind of holistic overhaul that new rules call for, many advisors are just changing parts of their overall plan and modus operandi as and when they receive new guidance, Abrahamson says. "Plan sponsors still haven't realized that major changes are what's going to be most advantageous to them and to their participants," he says.
In addition to getting a good handle on fees and lining up a sensible array of investment options for participants, Abrahamson also believes that plan sponsors need to be spending a lot more time and effort than they are on implementing automatic enrollment, a feature that will, in any case, be required by law in January 2008. Almost every 401(k) plan suffers both from low participation rates and under contribution, he says, but implementing automatic enrollment can take care of both.
"Every plan needs to look at adopting automatic enrollment with existing employees to increase both participation and contribution," Abrahamson says. "It's a win-win situation for all, but unfortunately, there is still little work being done out there to educate plan sponsors as to the advantages of automatic enrollment."