Ask David Wray, president of the Profit Sharing/401(k) Council of America, what the retirement landscape will look like in 2008, and he's quick to point out that the implementation of automatic enrollment in 401(k)s among many medium-sized companies will spike, adding perhaps 10 million more retirement savers to the 50 million now enrolled. That's based on an expected increase to 85% participation from the current 70% enrollment, Wray notes.
This increase, of course, is due to the proposed IRS regulations governing safe-harbor qualified automatic contributions and escalations. The safe-harbor protection the proposed rules provide went into effect January 1, 2008, if a company complies with the rules--even if the rules are later changed. Wray notes that since the proposed IRS auto enrollment and escalation regulations and the approved qualified default investment alternatives (QDIAs) were issued so late in 2007, many companies that want to implement a 2008 enrollment can't use the required 90-day notice required before the plan year, which for most companies is the calendar year.
On October 24, 2007, the Department of Labor (DOL) issued a final regulation effective December 24, 2007, on assets invested in a QDIA on behalf of participants and beneficiaries who do not direct the investment of their accounts.
2009 Not So Shabby, Either
These late regulatory changes could push some companies back to 2009 before they offer automatic enrollment, according to Wray, making 2009 a year for substantial enrollment. Since half of the bigger companies already have automatic enrollment, the biggest growth is going to come "the next layer down," Wray says, which means that automatically enrolled participants will typically be younger, new hires, but it will take a while for the approach to become fairly standard. That's because some of the older employees--not just the baby boomers, but the generation following the boomers--were typically not in a plan when they were younger and may look at the enrollment with a "skeptical eye" by now letting part of their paycheck go into a new account, Wray notes. But people become interested in their 401(k)s when their account hits $10,000, he says. Auto enrollment "becomes an eye-opening event, and the participant becomes a lot more interested in what is going on," says Wray.
Wray also anticipates "a lot of conversation" about target date funds. "How they will be structured will be very much in play--there will be a lot of new ideas...In the investment community, people are talking about monitoring (the funds) as a fiduciary," he says. "If you pick one of these target date funds, you have to monitor it in some kind of way," he cautions. The rules are that it has to work in a way with which the fiduciary is comfortable, he says, so there will be discussion about monitoring systems, as people build platforms to assess the funds, Wray predicts. "The move to a target date default is a very, very significant event and it will take a while to sort this out. Solutions will probably take two or three years," he estimates.
As for the actions by Congress to force more 401(k) fee disclosures, Wray says lawmakers have been putting pressure on DOL to get the job done, which is where he and others in the investment community think the job lies. "I think the DOL recognizes that if there is not some kind of regulation, some people in Congress will be pressuring for legislation."
Wray says that if the typical processes are followed, with all their built-in time frames for notices, calls for comments, and considerations of feedback, then it is likely there will be final regulations perhaps by the fall of 2008. "The sense is that a prospectus is not enough," Wray says. "You need to go somewhat beyond the prospectus...And you want employees to understand what their fees are," he says. His organization proposed a spreadsheet or an illustration where a snapshot of the plan investments are provided, including the fees charged by each of those investments, and how those fees will affect the return of each investment.
However, don't look for these to be campaign issues or even for much legislation to be passed in 2008, especially after the spring, because this is an election year, he reminds us (should we need it). To wit, the Senate bill including technical corrections to the Pension Protection Act passed in December but has not passed the House. The bill needs to be passed "fairly quickly," Wray says.
Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at firstname.lastname@example.org.