The Markets July 8, 2007

QDIA Guidance Has Retirement Community Holding Its Breath

As the retirement plan and investing community waits for the final regulations governing qualified default investment alternatives (QDIAs), there is significant anticipation to see whether the final pronouncement adds stable value funds to the acceptable list.
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Calling the situation fluid, adviser Jim O’ Shaughnessy, Managing Partner, Sheridan Road Financial, a Member Firm of NRP said he predicts a lot of wait and see and is advising many of his clients to wait to make their default choices until 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, speaking at PLANSPONSOR’s Plan Designs conference in Chicago.

Most panel members agreed that many plans won’t be making any moves until the DoL releases the final regulations, to see whether stable value gets listed alongside the original default suggestions of lifecycle funds, balanced funds, and managed accounts.

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Susan Walton, Senior Consultant at Watson Wyatt Investment Consulting, said she hopes that stable value does not get added to the group of approved options because since retirement plan participants suffer from inertia in their retirement savings decisions, being invested for too long in a traditionally low-return asset class might leave them with a potentially inadequate nest egg.

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.’

Although the panel did not always agree on the importance of stable value, target date funds appeared to be seen by all as a valuable default option – if chosen correctly. Walton reminded attendees that the fiduciary responsibility for monitoring lifecycle funds is the same as every other plan investment option. However, completing the same level of examination on these funds is difficult, panelists agreed, because the underlying fund components and asset allocation targets are so varied.

When evaluating suites of lifecycle funds, Peng Chen, president and chief investment officer at Ibbotson Associates, said advisers and sponsors should look at costs and who the underlying providers are. Chen also said it is important to look at the funds as they fit into a broader retirement income plan.

The panel agreed that these would be the most popular of the QDIAs – in fact, Joan L. Bozek, Managing Director, Merrill Lynch Global Wealth Management, said 75% of clients have opted to use them as a plan default.

IMHO July 7, 2007

IMHO: Other People’s Money

I was on a panel at our recent Plan Designs conference, and the topic of qualified default investment alternatives (QDIAs) came up.
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There was discussion about the Department of Labor’s proposed regulations on the subject; some observations about when we might expect to see final regulations; and ruminations from co-panelists Fred Reish and Mike Barry about ERISA’s embrace of the concepts of modern portfolio theory (MPT), and the importance of capital accumulation rather than capital preservation in making “appropriate’ investment choices for participants that hadn’t, for whatever reason, elected to make their own.

Then, a plan sponsor in the audience raised her hand and shared the experience of her plan—shared how they had carefully considered the alternatives of a stable-value investment alongside an asset-allocation alternative, and how they had decided on the former, and did so just before the market tanked in 2000. Her perspective was simply this: If they had chosen the asset-allocation alternative—chosen the option that many (most?) experts say they should have—people would have lost money.
These days, I think it is fair to say that “common wisdom’ would call for a different decision. In fact, the expert panel went on to basically lay out all the reasons why that was, if not a bad decision, at least not the one that ERISA’s prudence standard would seem to call for.
I understand the logic and rationale behind that perspective; and frankly, IMHO, most of the admonitions to broaden the DoL’s proposed QDIA definition to include stable-value choices seem self-serving, at best. We all know the issues with stable value—it’s ill-diversified (at least from the standpoint of the participant investor, though I find that the “single asset class’ labels are generally not precisely accurate), pricey, frequently layered with early withdrawal penalties and/or restrictions, and anything but “guaranteed’ (the way the old GIC label suggested). Still, I suspect that, for most of the participants that choose the option (and plan sponsors who choose default investments for participants), stable value provides what they are looking for—a return of their principal investment along with some stated rate of income. Simplistically, a bird in the hand, rather than two in the bush.
That doesn’t mean that stable value will gain the Department of Labor’s (DoL) official endorsement as a QDIA, of course—and, if stable value fails to make that list, it certainly will diminish its allure as a default choice (little wonder that the stable-value industry is up in arms, and that the mutual fund industry, which stands to gain significantly by the apparent endorsement of target-date solutions, has weighed in on the other side). That point of contention notwithstanding, current trends certainly seem to favor the adoption of asset-allocation solutions, rather than stable value, as default investments. Let’s face it: There’s a definite allure to being able to match a defaulted investment choice with the retirement date of a participant—a one-for-all solution that nonetheless seems at least somewhat customized. Finally—and for the lawyers, no doubt, sufficiently—ERISA’s concepts of investment prudence may well presume a certain reliance on the principles of MPT, ultimately demanding an asset-allocation solution.
There remains, however, IMHO, a case for a potentially different result when it comes to making decisions about “other people’s money.’ A solution that doesn’t require a plan sponsor to explain to participants about MPT, or to offer a rationalization about timing and the markets—and one that, certainly on a net basis, might provide a reasonable return compared with the relative volatility of an asset-allocation alternative. I’m not saying that that decision doesn’t have to pass ERISA’s muster, or that it doesn’t have, as outlined above, problems of its own. I am saying, however, that the plan sponsor is clearly responsible for the prudence of these default investments, and that they must therefore ask themselves, “Do I think that this default is prudent for the likely term of its investment in this plan?’
And if they can make a case for the prudence of that decision, then, “common wisdom’ notwithstanding, I think they have a case.

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For some interesting perspectives on the inclusion of stable value as a QDIA, see “SURVEY SAYS: Should There Be a Stable Value QDIA?’

See also “Default Ed’


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