Survey: QDIA Final Rule Will Mean Some Default Option Changes

January 29, 2007 ( - Nearly half of large defined contribution plan sponsors said in a recent survey that they would have to choose a different default investment option if proposed default safe harbor rules are finalized.

A Watson Wyatt Worldwide news release said 48% of the 95 DC plans would be forced to go with a different qualified default investment alternative from the categories set out in the Department of Labor (DoL)’s proposed rules: lifecycle or targeted-retirement date funds, balanced funds, or managed accounts.

Watson Wyatt said in the announcement that the final DoL rule is expected by mid-February.

Virtually all of the responding plans (94%) said they had a DC default option – primarily (72%) for situations in which employees don’t make their own investment selections, for auto enrollment (35%) and rollovers (17%). The survey found that the three top default options are lifecycle funds, stable value funds, and money market offerings.

Some 70% of the plans with an equity-based default option (lifecycle or balanced funds) offer a default as part of auto enrollment, the survey found. Meanwhile, 50% used them for rollovers, and 47% for employee non-selections.

Further, a third of employers now automatically enroll employees while an additional 57% are considering adding the option, the survey found.

Of those who don’t currently have auto enrollment, 26% said the employer match was too costly while 21% blamed the legal liability. Respondents also offered a variety of other reasons including high employee turnover and resistance from unions, according to the survey.

“Automatic enrollment and default investment programs can be a great help in providing more Americans with higher retirement savings,” said Mark Warshawsky, director of retirement research at Watson Wyatt Worldwide, in the news release. “But they require employers to carefully consider the likely impact on contributions and administrative costs, and to assess whether any plan design changes are needed. It’s to employers’ benefit to look at all ways to help employees to prepare for retirement. Otherwise, we may soon see a generation of workers that cannot afford to retire.”

Under the DoL’s proposed default investment safe harbor, employers would be protected from suits about the default investment option’s market performance. However, even if plans were to follow such a rule, plan sponsors are still liable for litigation about how the specific options were chosen within the broad categories and how they were later monitored (See DoL Releases Default Investment Option Safe Harbor )