Message from the Firm

By Fred Reish

For 2008, plan sponsors have a number of issues to consider for improving their 401(k) plans and to better manage their fiduciary risks.

Among those issues are:

1. Whether to implement the new fiduciary protections afforded by qualified default investment alternatives (or QDIAs) for participants who default-or, in other words, fail to give investment directions. From my perspective, it is inconceivable that any plan that experiences a significant number of defaults-regardless of whether automatically enrolled or not-would fail to obtain these substantial fiduciary protections.

2. Whether to automatically enroll. Automatic enrollment is now favored in the law. Furthermore, it is a godsend to plan sponsors who have struggled with increasing their participation levels and/or with passing their ADP tests. Based on data I have seen, automatic enrollment is being embraced by large- and mid-sized plans. In addition, we hear-primarily from providers-of an uptake in the use of automatic enrollment by small plans.

3. Whether to use safe harbor automatic enrollment. Unfortunately, I have heard that safe harbor automatically enrolled plans are not being widely adopted. Apparently, the problems are that those plans must automatically enroll old employees who never participated, well as new employees. As a result, the mandated matching contribution is too expensive for many companies to bear. However, for companies with good cash flow and solid balance sheets, it is a plan design that is advantageous in terms of compliance with the tax rules and in terms of the benefits provided to participants.

4. Whether to offer investment advice to participants. The Pension Protection Act creates a new category of "fiduciary adviser." However, the DOL has not issued the guidance needed to fully implement the PPA provisions. Once that guidance has been issued, though, I expect that the marketplace will be flooded with participant advice programs. Then, it will be up to plan sponsors to determine whether to solve the ongoing problem of poor participant investing through investment advice, investment management, QDIAs, target maturity funds, or other investments and services in the marketplace. Thus, while the advisory community is excited about the prospects of providing investment services to participants, the reality is that the success of those programs depend on whether they are embraced by plan sponsors, initially, and then by participants.

5. How to respond to the private litigation and DOL focus on fees, expenses and revenue sharing. I think that, by now, it is obvious to all but the most inattentive that plan sponsors need to understand the fees and expenses that are being paid by their plans and the investments, as well as to understand the amounts being received by service providers-typically through payments from the mutual funds included in the plans. Any plan sponsor who is not actively reviewing those costs and payments is taking an unnecessary risk.

As some say, when the rate of change outside an organization is faster than the rate of change inside the organization, the organization is in trouble. Applying that principle to plan sponsors and fiduciaries, it is clear that they need to be attentive to these changes and to be acting accordingly.

The articles in this newsletter discuss several of the issues summarized above, as well suggesting solutions for some of the problems.

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