A Question of Balance

The much-maligned 401(k) plan is being beefed up. So are the penalties for failing to manage it well.

Earlier this year, Stanford University got rid of actively managed target-date funds it had been offering participants in its retirement-savings plan — along with more than 200 other actively managed mutual funds — in favor of target-date funds from Vanguard Group that invest exclusively in low-cost index funds. The plan’s investment committee, says the school’s vice president of human resources, Diane Peck, “collectively didn’t feel it was appropriate” to continue offering the higher-cost, actively managed funds, although plan participants who want them can still access them through a self-directed brokerage window.

Meanwhile, some plan sponsors are leery of steering plan participants of the same age into the same target-date fund regardless of extenuating financial circumstances. For example, employees working for a company that offers both a 401(k) plan and a defined-benefit plan might want to take more risk in their target-date funds than employees working for a company that offers only
a 401(k) plan.

To address this issue, Great-West recently introduced a family of target-date funds that features a choice of three different glide paths and risk profiles for sponsors to choose from — conservative, moderate, and aggressive. To allay concerns about getting stuck with a vendor’s proprietary funds, this new family of target-date funds also invests in 28 different underlying funds from 20 different investment managers, and offers a mix of both passive and active investment strategies.

“Managed accounts” are another investment option attracting the attention of plan sponsors. With managed accounts, an investment adviser slots plan participants into preassembled portfolios based on their age, expected retirement date, risk tolerance, and other personal financial factors. Like target-date funds, managed accounts are recognized by the Labor Department as QDIAs, and as such offer the same fiduciary safe harbor. Bank of America Merrill Lynch says that 24 of its 40 largest plan-sponsor clients — and more than 300 of the roughly 1,500 plans it manages — offer its managed-account service. And plan provider Standard Retirement Services reports that about 40% of the plans it is signing up as new customers this year are using its managed-account service.

Rise of target funds; prevalence of key features in 401(k) plans

Fees and Expenses

Washington’s push to get more information to 401(k) plan participants about plan expenses will have repercussions for plan sponsors. The proposed 401(k) Fair Disclosure for Retirement Security Act would require that sponsors provide fee disclosures on investment options to plan participants, and while it has been pushed to the back burner by more-pressing legislative concerns, it is unlikely to go away for good, especially given the Obama Administration’s enthusiasm for greater transparency in the financial markets.

In the meantime, the Department of Labor is still expected to finalize proposed new regulations that would, under Section 408(b)(2) of the Employee Retirement Income Security Act, require plan-service providers to make additional disclosures about the compensation they receive and any conflicts of interest that may exist among them and other involved parties.


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