Department of Labor (DoL) officials last week
released the proposed safe harbor rule governing default
investment options that can be chosen by retirement plan
sponsors for auto enrollment programs and scenarios in
which employees fail to submit investment instructions
(See
DoL
Releases Default Investment Option Safe Harbor
) .
The qualified default investment alternatives
(QDIAs) in the proposal include:
Larry Goldbrum, executive vice president and
general counsel of The SPARK Institute, said the options
make sense. He pointed out that plan sponsors can look at
their retirement plan participant population and cater
their default investment option choice to the general
demographics.
The selections give plans sponsors flexibility,
Goldbrum told PLANSPONSOR.com. They can choose the option
good for the plan as a whole, such as a balanced
fund, or select target date funds to cater to employee
age ranges, or choose the managed account option to cater
to the individual participant.
However, Dallas Salisbury, president and CEO of the
Employee Benefit Research Institute, expressed concern
about the QDIAs proposed. He said the main issue is how
plan sponsors can properly default young and mobile
participants who are likely to leave the plan soon and
more likely to take their money out without having some
kind of stable value or money market option. The worry is
that without a stable value or money market-type option
(or both), people will take out their money in a
down market and have to take the loss. Salisbury
wants to add both a money market and a stable value
option along with the three existing QDIA alternatives
set out by the DoL.
Salisbury
said he is also concerned that plan lawyers will
pressure sponsors away from pushing for additional
QDIA alternatives because of the safe harbor offered for
the three approved options and the signals that the
DoL hopes plans use the ones it has proposed.
While he said he certainly supports the DoL's
stated goal of continuing to encourage long-term
retirement saving, Salisbury argued that it is simply
unrealistic in a day when plans offer loans and hardship
withdrawals as ways for participants to take money out
over the short term. "That's not how retirement
plans are structured," Salisbury said of the
existing rule proposal.
On that issue, Philip Suess, principal with Mercer
Investment Consulting and segment leader for its DC
business, notes the DoL is not ruling out money
market or stable value default investments. The point is
there is protection if the plan sponsor wants to move to
equity vehicles as default options, but the department
maintains money market and stable value vehicles are not
imprudent.
The QDIA protections mirror protections given by
404(c), Suess points out. The DoL is telling
plans to follow its suggested process for selection
in funds and plan officials will not responsible for
losses that may be incurred. Just like 404(c), the
fiduciary still has responsibility in selecting and
monitoring such funds. Also, just as compliance with
404(c) is voluntary if sponsors want to afford themselves
its protection, choice of a QDIA is also
voluntary.
Goldbrum agrees. He said stable value and money
market vehicle providers may have felt they were
overlooked, but the department was signaling a shift from
short-term cash preservation to more long-term growth and
was removing a barrier of concern about potential
lawsuits if plan sponsors choose an equity-type
investment.
Related to the QDIA choices, Rich Koski, managing
director at Buck Consultants, said he was
surprised the DoL went with target date funds
because some have what he said is a high equity
exposure and unusually high fees. He also questioned the
DoL's instructions to consider the average
participant in the plan as a whole when selecting a
balance fund option since most of the people in the plan
will not be defaulters. According to Koski, a balanced
fund for defaulters should take into account those likely
to use them - the younger, more mobile workers.