PD2007: Stable Value QDIAs Draw Concerns

The reason, according to Walton, a Senior Consultant at Watson Wyatt Investment Consulting: The much chronicled tendency for participants to suffer from inertia in their retirement savings decisions might well keep them in the traditionally low-return asset class too long and leave them with a potentially inadequate nest egg.

“Once they’re there, they’re there,” Walton told a discussion panel at the recent PLANSPONSORPLAN DESIGNS conference in Chicago. “That’s staggering to us.”

Fellow panelist Joshua R. Cohen, a Senior Consultant at Russell Investment Group, agreed with Walton’s assessment. “I really hope stable value is not on par with the other (options),” Cohen said. “It’s really hard to make a case for stable value.”

insiders told another PLAN DESIGNS conference panel (see PD2007: CA Democrat Seen as Important Pension Player ) that lobbyists were putting intense pressure on both the Department of Labor (DoL) and the Office of Management and Budget to add a stable value default option to its proposed list of qualified default investment alternatives (QDIAs) (See DoL Releases Default Investment Option Safe Harbor ) .

The initially proposed approved default categories included:

• lifecycle or targeted-retirement date funds,
• balanced funds, and
• managed accounts.

There can be little doubt about the popularity of the target-date default option: Joan L. Bozek, Managing Director, Merrill Lynch Global Wealth Management, said 75% of the firm's clients have opted to use them as a plan default.

In discussing the target-date fund option,panelists stressed that plan sponsors should think of their provider as giving them an asset allocation service. That means they should still give a target-date fund the same level of due diligence as they would any other service provider, the panelists asserted.

"You still have the same level of obligation to understand who you are having facilitate that service," Walton asserted. "You are responsible as a fiduciary for continuing to monitor it."

But, even if plan sponsors are trying to carry out their due diligence requirements, the panelists acknowledged the inherent difficulties in evaluating target date offerings because of the complexities of judging their underlying fund components.

In that vein, Peng Chen , president and chief investment officer at Ibbotson Associates, recommended plan sponsors focus on issues such as:

• Who is making investment decisions for the fund?
• What is the cost?
• Who are the providers?

Moving Too Soon?

Adviser Jim O'Shaughnessy cautioned plan sponsors against moving too quickly if they make their default choices before the DoL releases its final approved list."I'd be hesitant as a plan sponsor to have something that was not listed as a QDIA by the DoL because that brings up all kinds of issues," said O'Shaughnessy, Managing Partner, Sheridan Road.

Premature choices might not be that big of a problem, however. The panel was agreed on one thing: many plans won't be making any moves until the DoL releases its final pronouncement. In fact, Bozek has seen many clients already sitting on their hands until the situation gets clarified - particularly if stable value gets added. Declared O' Shaughnessy: "This is a very fluid situation. I think there will be a lot of wait-and-see."