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.