401(K) Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants

51 Pages Posted: 17 Mar 2016

See all articles by Charles Jeszeck

Charles Jeszeck

Government Accountability Office (GAO)

David Lehrer

Government Accountability Office (GAO); National Academy of Social Insurance (NASI)

Jonathan McMurray

Government Accountability Office (GAO)

Cheryl Jones

Government Accountability Office (GAO)

David Lin

Government Accountability Office (GAO)

Stu Kaufmann

Government Accountability Office (GAO)

Daren Sweeney

Government Accountability Office (GAO)

Mark Glickman

Government Accountability Office (GAO)

Date Written: August 25, 2015

Abstract

Employers who sponsor 401(k) plans report using a range of default investment types to automatically enroll employees in their plans based on each type's design and other attributes. From 2009 through 2013, the majority of employers who sponsored 401(k) plans reported using a target-date fund as their default, according to data from three annual industry surveys that GAO reviewed. A target-date fund is a product or portfolio that changes asset allocations and associated risk levels over time with the objective of decreasing risk of losses with increasing age. Fewer plan sponsors reported using the other two default investment types that the Department of Labor (DOL) identified: balanced funds — products with a fixed ratio of equity to fixed-income investments — or managed account services — investment services that use participant information to customize asset allocations. Plan sponsors completing GAO's questionnaire said that they generally looked for asset diversification, ease of participant understanding, limited fiduciary liability, and a fit with participant characteristics when selecting a default investment. Some stakeholders that GAO interviewed also identified positive attributes of each default investment type and highlighted other factors that could influence a plan sponsor's default investment selection, such as plan sponsor preferences; plan circumstances; or changes in the plan's environment like a plan merger or court decision.

Plan sponsors generally monitor plan investments, including default investments, periodically to ensure alignment with the plan's objectives and investment strategies, according to stakeholders GAO interviewed and plan sponsors responding to GAO's questionnaire. Stakeholders that GAO interviewed generally said that the type of default investment and a plan's circumstances — such as the availability of resources and expertise devoted to investment monitoring — can affect the extent of a plan sponsor's monitoring efforts and the response to monitoring results. Plan sponsors responding to GAO's questionnaire and stakeholders GAO interviewed said that after an extensive default selection process, some plan sponsors may be reluctant to change the default investment regardless of monitoring results. For example, a plan sponsor and service provider may have negotiated a reduction in overall plan investment management fees in exchange for using a provider's investment as a plan's default, making it more difficult to change.

Plan sponsors cited regulatory uncertainty, liability protection, and the adoption of innovative products as significant challenges when adopting one of the three default investments. DOL regulations outline several specific conditions that plan sponsors must adhere to in order to receive relief from liability for any investment losses to participants that occur as a result of the investment. Plan sponsors responding to GAO's questionnaire and stakeholders GAO interviewed generally said that the regulations were unclear as to: (1) how sponsors could fulfill the regulatory requirement to factor the ages of participants into their default investment selection; (2) whether each default investment provided the same level of protection; or (3) whether they were allowed to incorporate other retirement features, such as products offering guaranteed retirement income, into a plan's default investment. Such uncertainty could lead some plan sponsors to make suboptimal choices when selecting a plan's default investment that could have long-lasting negative effects on participants' retirement savings.

Keywords: retirement, retirement plans, 401(k), QDIA, defined contribution plans, GAO

Suggested Citation

Jeszeck, Charles and Lehrer, David and McMurray, Jonathan and Jones, Cheryl and Lin, David and Kaufmann, Stu and Sweeney, Daren and Glickman, Mark M., 401(K) Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants (August 25, 2015). Available at SSRN: https://ssrn.com/abstract=2747384 or http://dx.doi.org/10.2139/ssrn.2747384

Charles Jeszeck

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

David Lehrer (Contact Author)

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

National Academy of Social Insurance (NASI) ( email )

1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904
United States

Jonathan McMurray

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Cheryl Jones

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

David Lin

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Stu Kaufmann

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Daren Sweeney

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Mark M. Glickman

Government Accountability Office (GAO) ( email )

441 G St. NW
Washington, DC 20548
United States

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