CHICAGO — While the Department of Labor has yet to issue final regulations on default options for 401(k) plans, many companies are jumping ahead and incorporating a qualified default investment alternative into their retirement plans.
The 2006 Pension Protection Act offers plan sponsors insulation from liability. It allows them to direct employees automatically to a QDIA if the participant fails to provide an investment choice.
The department has defined a QDIA as a life cycle fund, a target date fund, a risk-based balanced fund or investment management service such as a managed account.
While some advisers and plan sponsors are waiting for the department to issue its final regulations, others are beginning to adopt funds that offer more equity exposure.
There’s no sense waiting, said Tim McCabe, senior vice president of PMFM Inc., an independent registered investment advisory firm.
Advice driven product
PMFM offers an advice-driven managed account product to plan sponsors. So far, the Watkinsville, Ga.-based company has partnered with The Guardian Insurance and Annuity Co. Inc., a division of The
Guardian Life Insurance Company of America in New York.
Guardian provides PMFM’s managed-account product to at least six plan sponsors that are using it as a qualified default option.
PMFM hopes to partner with other companies later this year.
The department is unlikely to make changes that would affect the use of managed accounts as a qualified default option, Mr. McCabe said.
“We thought we had a compelling product and wanted to be first to the market,” he added. “If we’re not the first, we wanted to be at the leading edge of this. We really think it’s a great service. It’s the right product at the right time.”
The number of companies on board with this plan seems to be growing daily, said Dennis Mosticchio, senior vice president of group pensions at The Guardian Insurance and Annuity Co.
“We wanted to be at the forefront of the industry,” he said. “Under the Pension Protection Act of 2006, sponsors like the protection it provides, as well as the fact that it makes things easier for them, because in some instances, they no longer need enrollment meetings.”
Officials at J. & W. Seligman & Co. Inc. also said that plan sponsors are not waiting for the department’s final ruling. They’re offering as default options funds that hadn’t been allowed until the pension act.
By the end of June, nearly 300 plan sponsors had signed up to use one of the New York-based company’s funds as a qualified default option.
The company has seen a huge pickup in activity in recent months. Part of the challenge is educating plan sponsors that it is acceptable to put their employees’ money in funds that offer more growth, said Paula Smith, a senior vice president.
Advisers, too, are scrambling to educate plan sponsors, said Gary Tarpening, a product manager with Seligman Advisors Inc., an affiliate of J. & W. Seligman.
“Choosing and selecting a default option that has equity is quite a challenge for plan sponsors, if you think about the psychological implications for them,” he said. “They’ve been comfortable [with conservative funds], and they know equity is risky, and all of a sudden, they’re being told to reverse course. It’s really created a very big demand for the skills of advisers working with plans.”
