The Pension Protection Act (PPA) has ushered in a retirement debate that will rival the technology industry’s Betamax-VHS format war of the 70s and 80s. The qualified default investment alternative (QDIA) provisions of the PPA are changing the landscape of our industry, giving plan sponsors unprecedented fiduciary protection and providing more options for participants.
While our industry is quick to agree on the positive effect the QDIA provisions will have on both plan sponsors and participants, the question of which of the 3 QDIAs will be most widely used–managed accounts, target date funds, or balanced funds–is still open for debate.
By most indications, employers are proceeding cautiously into investment options they already know. According to a recent survey by Callan Associates, 79% of plan sponsors overwhelmingly prefer using a QDIA for their plan and target date funds are the QDIA of choice. The advent of managed accounts as a QDIA, however, has given plan sponsors more to think about. And while managed accounts have started off slowly, the option is now picking up considerable momentum, particularly with small businesses.
Managed accounts offer big options to small business
There are good reasons why managed accounts are beginning to catch on. Offering a benefit generally assumed to be available only to high-net-worth individuals or employees of larger companies represents an important edge for small business owners in the competition to attract and retain top talent. In fact, according to the 2006 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, 70% of employees said they would be interested in using a managed account for their 401(k) plan assets.
Typically reserved for only the largest corporate plans with assets of $400 million or more, the managed account option was far out of reach for small business owners. Under the new QDIA provisions, providers are working to leverage scale and provide managed account services at a lesser cost for small business plan sponsors.
Now, small businesses with retirement plan assets of as little as $50,000 can contract with an advisor to offer a managed account QDIA to their employees. In fact, small businesses and startups new to the 401(k) market with zero qualified retirement plan assets can exercise this new option.
Small businesses can reap goodwill from their employees with a managed account QDIA. The managed account option lets employees get professional investment advice in a cost-efficient way while limiting plan sponsors’ fiduciary liability. For small business plan sponsors faced with participants who lack the knowledge or time to make the appropriate investment decisions, this option is a welcome alternative to default options under qualified retirement plans that leaned on money market funds which, over time, have yielded gains that fall short of the compounded interest most workers need to grow their retirement savings at an adequate pace.
Time is right for managed accounts