Target-Date Mutual Funds a Sponsor Smash Hit for QDIAs

March 13, 2008 ( - The latest Callan Associates study of the impact of the Pension Protection Act (PPA) provides yet another confirmation of the popularity of target-date funds.

A Callan news release of about 90 large plan sponsors with a total of $120 billion in assets and more than two million participants, found that 79% of the plan sponsors preferred using a qualified default investment alternative (QDIA) (see Building a Better Default ) and target date funds are the QDIA of choice, particularly mutual funds.

Some 49% of those offering or anticipating offering a target date or target risk fund as the QDIA will use a mutual fund structure, Callan said.


Momentum Building

However, the Callan data showed momentum building for collective trusts and a customized mix of asset allocation funds. Eighteen percent of plan sponsors in the survey currently use or intend to use a custom mix of funds for their QDIA, up from 11% in Callan’s 2007 QDIA Survey, the announcement said.

“The movement towards customization within target date funds is likely attributable to new QDIA regulations that allow plan sponsors to manage a custom mix without being a registered investment adviser,” said Lori Lucas, DC practice leader at Callan Associates, in the news release. “It rewards large plan sponsors that have inexpensive DC cost structures and offer best-in-class DC funds for the benefit of plan participants.”

Callan also found that fee analysis and fee disclosure are priorities for plan sponsors in 2008. Forty-eight percent of respondent firms anticipate or will consider engaging in a fee analysis of their DC plan, compared to 23% who have no interest. Meanwhile, 32% of plan sponsors intend to voluntarily enhance fee disclosure.

Automatic Trends

The study also found that by the close of 2007, 44% of those surveyed offered auto enrollment with another 6% reporting they were likely to add it in 2008 – an increase from 35% at the end of 2006.

Finally, Callan found that a significant number of plans, 87%, do not offer a guaranteed income for life investment option and that most, 99%, were unlikely to offer it in 2008.

Callan said of the respondents in the latest poll 77% represent 401(k) plans; 11% are 401(a) and 6% are profit sharing plans. Forty-three percent qualify as “mega” plans worth more than $1 billion in assets and fewer than 17% have assets of less than $100 million.

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