Reish, an attorney with Reish Luftman Reicher & Cohen, discussed the future of participant directed plans last week with attendees at the Retirement and Benefits Management Seminar in Charlotte, North Carolina. He told attendees that a successful 401(k) plan is one that provides adequate and broad-based retirement benefits. Fiduciaries are required by ERISA to engage in a prudent process for the exclusive purpose of providing retirement benefits – and successful benefit levels provide the same standard of living in retirement as during their working career, Reish said.
However, it can be difficult to gauge that measure of success, Reish said. Therefore, he suggested three pillars of a successful retirement plan, all of which can be measured; participation levels, deferral rates, and the quality of participant investing.
The industry needs to do better when it comes to participation rates and deferral rates, according to Reish. The national average of eligible employees who participate in their retirement plan is about two thirds – this was great when 401(k) plans were supplemental savings plans, he said, but lousy for retirement plans. Automatic enrollment will be a significant help for this, he believes, because the program works without upsetting employees.
As for deferral rates, people can defer less if they are going to work longer, but the industry has not done a good job of helping people understand what they need to save in order to retire at various ages. “The industry doesn’t tell you that you need to be deferring 9.7% in order to retire at 65,” Reish commented.
When it comes to quality of participant investing, Reish suggested that a good measure of success is whether half of new dollars going into a plan are in asset allocation funds. ERISA is predicated on a belief that participants are using modern portfolio theory to make their investment selections, Reish said, but in actuality, no one is doing this. Employees therefore, in order to ensure quality investing, should be using one of the asset allocation solutions, he said.
Part of this will be helped by the implementation of the qualified default investment alternatives (QDIAs), he told the audience. Reish said that he does not believe stable value will be added back into the list of allowed options, although he does believe that asset allocation models will come back into the list, especially because they are available for a very low cost for large plans, something that fits with the Department of Labor’s recent interest in plan fees. Although the proposed regulations did not specifically include lifestyle funds (risk-based asset allocation funds), Reish said that they can be included as part of the balanced fund option. However, plan sponsors will not be able to put people into a suite of them, instead they will have to pick one of the four or five options that fits their workforce demographic, and that will most likely will be the middle risk option, he suggested.
In fact, QDIAs coupled with automatic enrollment are going to change the 401(k) market; not only can they be used as traditional and automatic enrollment defaults, but can be used for mapping and in conversions. Additionally, they can also be used as re-enrollment defaults, Reish said, where the participants are all moved into the default fund unless they elect otherwise.