Products February 18, 2014

New Guide Supplements DOL TDF Tips

The Defined Contribution Institutional Investment Association (DCIIA) has released a white paper titled, “DCIIA Guide to U.S. Department of Labor Tips on Selecting Target Date Funds.”
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The paper is intended to supplement the Department of Labor’s (DOL’s) fact sheet about selecting target-date funds (TDFs) and offer additional information about the different types of products that may be available.

DCIIA says it expects plan fiduciaries will find the DOL’s target-date fund fact sheet to be a useful tool. It is written in clear, non-technical language and includes steps that plan fiduciaries can easily understand.

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There are many options for plan fiduciaries to consider when deciding whether to incorporate a TDF into an investment lineup. In its fact sheet, the DOL emphasizes that considerable differences exist among TDFs; it points out the need for plan fiduciaries to understand the principal components of the various TDF strategies, as well as the primary differences among them, and to consider these factors when determining which, if any, TDF would work best for their plan. Several of the central differences—glide path and portfolio construction, off-the-shelf versus custom, type of investment vehicle underlying the strategy, and cost—are discussed in DCIIA’s white paper.

Lew Minsky, DCIIA’s executive director, comments: “A good starting point for plan fiduciaries when reviewing TDFs is to note that, while there are many variations among these funds, generally they all seek to offer: diversification among asset classes; professional fund asset management pre- and post-retirement, and reduced exposure to equities as participants near retirement age.”

These features, as well as the fiduciary protections available when one of these funds is offered as the plan’s qualified default investment alternative (QDIA), may make a TDF a prudent choice for both a plan fiduciary and plan participant. As an alternative to a TDF, some plan sponsors may choose another type of QDIA, such as a managed account or a balanced fund.

Each plan’s unique characteristics and circumstances will help inform an appropriate selection in which a wide range of product choices is available. Investment performance, level of diversification, cost and consistency with the plan’s objectives are key factors in default investment selection. Whatever the choice, both adhering to a selection process and documenting the decision are critical.

In March 2013, the DOL offered general guidance to assist plan fiduciaries in selecting and monitoring TDFs (see “Incorporating DOL TDF Tips into Your Processes”).

Data & Research February 18, 2014

Most 401(k) Plan Fees Declining or Flat

In 2013, costs for small retirement plans decreased, while those for larger plans remained flat.
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According to the 14th edition of the 401k Averages Book, the average total plan cost for a small retirement plan (50 participants and $2,500,000 assets) declined from 1.46% to 1.44%, while the average total plan cost for a large retirement plan (1,000 participants and $50,000,000 assets) remained flat at 1.03%.

“In most of our fee benchmark scenarios, we saw a decline in total plan costs and investment fees on a year-over-year basis,” says David Huntley, co-author of the book, who is based in Baltimore. Research shows the small plan average investment expense went from 1.37% to 1.35%, while the large plan average investment expense bumped up from 1% to 1.01%. “In cases where it stayed flat or ticked up, the increase in equity exposure in our allocation model was typically the reason,” says Huntley.

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“The effects of fee disclosure and competitive pricing narrowed the range of the middle 50% of the product universe for most of the benchmark universes,” says Joseph Valletta, another co-author of the book. “The small retirement plan universe saw the range of the middle 50% shrink from 36 basis points last year to 29 basis points this year, while the large plan variance went from 21 basis points to 20 basis points.”

Valletta adds, “With so many small employers either sponsoring or starting 401(k) plans, we also released a new set of benchmarks for plans with 10 participants (also known as micro plans). One benchmark assumes plan assets of $500,000 while the other is $100,000.” The research finds the average total plan expense for a 10-participant plan with $500,000 in assets is 1.90%.

The 401k Averages Book is a resource for non-biased, comparative 401(k) average cost information, designed for financial professionals and plan sponsors. More information can be found at http://www.401ksource.com.

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