Deals & People December 7, 2009

Fee Probe Leads Alabama to Change 457 Providers

Alabama is switching to a new 457 deferred compensation plan provider amid concerns about the previous provider and its relationship with the Alabama State Employees Association (ASEA).

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The Montgomery Advertiser reported that as of December 14, the state personnel board will switch the plan from Nationwide Financial Services Corp. to Great-West Retirement Services. Nationwide has been the provider for the $380-million plan for 30 years.

Last year, the Alabama Securities Commission reported that its probe into “endorsement fee” payments by Nationwide to the ASEA and Public Employees Benefits Corporation (PEBCO), the union’s for-profit subsidiary, found the payments began in 2001 and reduced the amount of interest paid on the fixed option of the plan by 20 basis points (see “Ala. Attorney General Takes Over 457 Plan Fee Probe”).

“The funds paid to ASEA/PEBCO do not appear to be justified, and are in fact mostly profits to the association. It is also certain that it is not disclosed to state employees who participate in the plan that funds they believe are going into a retirement account are being used to subsidize the ASEA,” the report said.

The fees totaled more than $11 million, according to the news report. State Personnel Director Jackie Graham said the switch will be advantageous to employees, providing increased transparency, more stability, and a better fixed rate of return option.

Several state employees have sued Nationwide and ASEA, claiming the plan hurt state workers and money should be returned to the plan’s participants. However, ASEA, which requested but never received information on fees, analysis, and comparisons of the proposed plans to Nationwide, is contending in court that the personnel board interfered with its relationship with Nationwide.

The Markets December 7, 2009

Many Target-Date Investors Also Invest in Other Funds

Retirement plan participants invested in target-date funds along with other funds offered by the plan could end up with a potentially inferior portfolio in terms of risk/return tradeoff, according to a study by the Employee Benefit Research Institute (EBRI).

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The study in the December EBRI Notes pointed out that target-date funds were designed to be “all-in-one” portfolios that diversify asset allocations and rebalance over time based on a defined target-date horizon, benefitting participants who lack financial literacy or desire to manage their investments. “However, holding TDFs with other funds could lead to an unexpected result of ending up with a potentially inferior portfolio in terms of risk/return tradeoff from more assets allocated to some sectors than the designers of the target date funds had planned,” according to the study.

The study found that “mixed” target-date fund users, or target-date fund users who hold the funds in combination with other funds in their 401(k) plan menu, accounted for about 55% of all participants holding target-date funds in their accounts as of the end of year 2007. Mixed target-date fund investors are likely to be middle-income and middle-wealth participants, whereas participants who only invested in target-date funds are likely to be younger or lower-salaried participants who were automatically enrolled into the target-date funds.

In addition, mixed target-date fund users are more likely to hold multiple target-date funds than are users who invest only in target-date funds, and low-level mixed target-date fund users (who invest less than half of their account balances in the funds) are more likely to use two or more target-date funds than are high-level mixed users (who invest more than half their balance in the funds), according to the study.

EBRI also said mixed users holding relatively aggressive target-date funds for their age group (such as someone in their 50s investing in a 2050 fund) are more likely to actively invest in equity funds than those following age-specific investment rules.

The study used a sample from the 2008 EBRI/ICI 401(k) database looking at plans having at least 10 participants and offering any target-date funds in 2008. The sample includes participants ages 20 to 69 with account balances between $10,000 and $250,000 as of year-end 2008.

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