YOU CAN DEMONSTRATE your value to plan sponsors by helping them address their default fund choice in light of the provisions of the Pension Protection Act (PPA).  

In response to the PPA, the Department of Labor (DOL) has proposed Qualified Default Investment Alternatives (QDIAs), which include lifecycle funds, target-date funds, balanced funds, and professionally managed accounts. Notably absent from this list: money market funds which, while safe, may not get long-term defaulters to their retirement goals.

Plan sponsors who select a QDIA for their retirement plan may receive Section 404(c) relief of fiduciary liability for their default fund.

The PPA also includes provisions designed to encourage automatic enrollment in retirement plans, an important side effect of which is a dramatic increase in the proportion of assets that go into the plan’s default fund. 

So if the provisions of the PPA call for plan sponsors to address their default investment, how do you go about helping them select one? 

1. Characterize the employee population. How many employees end up in the default fund, and for how long? Defaulted participants typically fall into two groups: short term defaulters who provide investment instructions relatively quickly and the “don’t know, don’t care” long-term defaulters, who never get around to making their own investment choices.

2. Consider the effects of automatic enrollment. If the plan includes automatic enrollment, or if you’re planning to implement it, then it is likely that many participants will choose the default investment and remain in it for extended periods of time.

3. Choose an option that best fits the needs of the majority of participants. For example, if you have determined that there are many long-term defaulters, consider a default fund that offers more growth potential than a traditional money market fund. Even participants nearing retirement will likely need some equity investments to provide growth over their many years in retirement.

4. Implement the new default fund choice.

• Document the fund selection process.
• Amend the Investment Policy Statement (IPS), if there is one.
• Contact the plan’s record keeper to make the required administrative changes.
• Notify the participants of the change. Remember, the PPA deems participants as exercising control over their assets as long as they receive proper advance notice about the default fund and instructions for choosing their own investments.

Participants are increasingly remaining in their plan’s default investment option, and the implementation of automatic enrollment is likely to increase those numbers.  Be there to help your plan sponsors with the important task of selecting their default investment option.

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

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

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