401(k) changes seen ‘significant’

WASHINGTON — New default options that the Department of Labor will likely approve for 401(k) investments will have a “significant” impact on the way mutual fund assets are invested, independent fund directors were told at a conference here April 12.
Under the Labor Department’s draft rule issued this year implementing the Pension Protection Act of 2006, companies will likely have to invest 401(k) assets in diversified-portfolio funds when employees fail to select their own investments.
When employees have failed to do so, companies have traditionally invested most of the money in stable-value products or money market funds, according to Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute, a Washington organization that researches employee benefit issues. The Labor Department didn’t propose either of those investment options.
If the Labor Department finalizes the proposal, “the implications from the fund perspective vis-à-vis current asset distribution and future asset distribution will be significant,” he told about 150 participants of the seventh annual Policy Conference of the Mutual Fund Directors Forum. The forum, which is based in Washington, represents independent fund directors.
The Labor Department has proposed giving three default options to companies that sponsor 401(k) plans: “targeted age” investments, based on participants’ target retirement date; balanced funds; or managed accounts. The default investment regulation is likely to be finalized within a month.
“Most employers are looking at age-targeted” funds, Kathleen Ziga, a law partner at Dechert LLP in Philadelphia who works on employee benefit issues, said during a panel discussion at the conference.
New products will be introduced soon to meet demand for targeted-age funds, she predicted.
A survey conducted by Callan Associates Inc. found “no interest in managed accounts,” Lori Lucas, senior vice president and defined contribution plan leader at the San Francisco-based investment consulting firm, said during a panel discussion at the conference. The relatively high cost of managed accounts is a primary concern for plan sponsors, she said.
More proprietary target date funds of funds are being offered by mutual fund companies, Ms. Lucas said, but the cost of such plans concern them. Instead, companies are looking at alternatives such as best-in-class target date funds, collective trusts using a variety of fund managers, or target date funds with alternative investments such as real estate, she said.
Target date funds also could be tied to an annuity feature, Ms. Lucas said. The market is “transforming these 401(k) plans very much into something that looks a lot like a [defined benefit] plan,” she said.
The Pension Protection Act makes it easier for companies to enroll their employees automatically in 401(k) plans unless employees choose not to be enrolled. That is expected to increase significantly participation levels and money going into 401(k) plans.
The act is also aimed at making it easier for employers to provide investment advice for 401(k) plans. So far, Ms. Ziga said, financial services companies are more interested in offering advice than are plan sponsors, because so much advice is offered free on the Internet already.
The individual retirement account market will prove to be a better one for offering investment advice than the 401(k) market, with plan participants seeking advice when they move their assets out of 401(k) plans at retirement, she said.