THE PENSION PROTECTION Act (PPA) boldly redefines risk for the millions of people who participate in 401(k) plans but do not choose their investment and may prove to be among the most significant factors leading to a wealthier and more financially secure retirement for Americans.  

Most plan sponsors choose a “risk-less” default investment option like money market funds and stable value funds,* because they seek to protect participants against loss.  

However, the PPA challenges this traditional, one-dimensional notion of risk.  By offering a safe harbor to plan sponsors who consider default funds that offer long-term capital appreciation, Congress and the Department of Labor have recognized that, for those participants with longer time horizons until retirement, money market funds and stable value funds create the very real risk of not having enough money to retire.   

The importance of this breakthrough in the treatment of investment risk is easy to underestimate. To illustrate the tradeoff, consider the hypothetical results of investing in a typical money market fund compared with a diversified, balanced portfolio designed for investors seeking long-term capital appreciation and capital preservation.  With respect to an investment in a money market fund, we used 90-day US Treasury bills.  For the diversified, balanced portfolio, we invested assets accordingly: 45% US equity securities, 10% international equity securities, 10% equity REITs, and 35% fixed income. (See “Description of Model Portfolio Indices.”) All results are based on index returns, rebalanced monthly, for the period January 1, 1972 through December 31, 2006, and do not reflect any costs of investing in mutual funds.

Over the entire 1972 - 2006 period, equal monthly investments in the diversified, balanced portfolio would have produced four times more wealth than a similar investment in T-bills.  This is particularly noteworthy because these 35 years include the severe negative equity returns of the 1973-74 period as well as 2000-2002.  Of course, past performance does not guarantee or indicate future results.

By opening the way for diversified, balanced portfolios as default investment options to 401(K) plans, the PPA offers an extraordinary opportunity to seek the long-term positive results that prudent but meaningful equity investments can potentially produce.   The potential benefit for younger workers is a lifestyle-changing increase in wealth at retirement.

To learn more about enhancing a plan’s default investment option in light of the PPA, please contact Seligman Advisors at 888-597-1553.  

Given the increasing prevalence of participants remaining in their plan’s default investment option, particularly with the green light given to automatic enrollment, the default investment option is more important than ever.  Check out next month’s 401kAdvisorExchange to learn how you can help plan sponsors select a prudent default investment option in light of the PPA.

The Seligman Group of Funds is distributed by Seligman Advisors, Inc.

* Stable value funds typically invest in high-quality bonds and interest-bearing contracts and guarantee to maintain the value of principal and accumulated interest, and money market funds typically seek to maintain a consistent net asset value of $1.00 per share by investing in short-term high-quality debt securities. Stable value funds and money market funds generally carry lower fees and expenses than a traditional equity mutual fund.

Description of Model Portfolio Indices

US Medium-Company Stocks: 1979 – 2006: Russell Midcap Index; 1972 – 1978:

Estimated as the midpoint between the total return for the Ibbotson Small

Stock Index and the Standard & Poor’s 500 Composite Stock Index (S&P 500).

US Large-Company Stocks: S&P 500.

International Stocks: MSCI EAFE Index.

REITs: FTSE-NAREIT Equity REIT Index.

Fixed Income: 1976 – 2006: Lehman Brothers U.S. Aggregate Bond Index; 1973 –

1975: Lehman Brothers Government/Credit Bond Index; 1972: Citigroup

Long-Term High Grade Corporate Bond Index.

Indices are unmanaged and one cannot invest directly in an index.

Common stocks are subject to market price fluctuations. There are specific risks associated with global investing such as currency fluctuations, foreign taxation, differences in financial reporting practices, and rapid changes in political and economic conditions.  Investments in real estate securities may be subject to specific risks, such as risks to general and local economic conditions, and risks related to individual properties. Bonds are subject to interest-rate risk, credit risk, prepayment risk, and market risk.

You should consider the investment objectives, risks, and charges and expenses of a Seligman Mutual Fund carefully before investing. A prospectus containing information about a Seligman Mutual Fund (including its investment objectives, risks, charges, expenses, and other information about the Fund) may be obtained by contacting your financial advisor or Seligman Advisors, Inc. at 800-221-2783. The prospectus should be read carefully before investing in a Seligman Mutual Fund.

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