Message from the Firm

By Fred Reish

The Pension Protection Act (PPA) is making its mark on the 401(k) community.

The use of automatic enrollment is expanding rapidly. Many of our plan sponsor clients, who are typically mid-sized corporations, either already automatically enroll or are planning on switching to automatic enrollment on January 1, 2008. We are also seeing more use of automatic enrollment by small plans, particularly between $5 to $10 million in assets. To be honest, I am surprised with how quickly automatic enrollment is being accepted. I now believe that it is possible that, within the next five years, automatic enrollment will become the "regular" way to set up a 401(k) plan.

There has also been rapid acceptance of age-based lifecycle funds, risk-based lifestyle funds and managed accounts. While these vehicles were already gaining acceptance--because of concerns about participant investing abilities, the PPA safe harbor for default accounts seems to have accelerated their popularity.

So, we are witnessing a rapid improvement in 401(k) plans--at least in terms of participation and participant investing. The next steps are to improve the information given to participants about the deferrals rates that are needed for benefit adequacy.

Of course, it is impossible to talk about 401(k) plans and fiduciary responsibility without also mentioning expenses and revenue sharing. In my opinion, indirect payments between plan providers--typically sourced in the investments--is the issue of 2007. The drip torture goes on and on ... class action lawsuits, popular media attention, proposed DOL guidance, .... In the end, though, participants will be the big winners if fiduciaries pay more attention to fees and expenses--and to the revenue sharing which they support. However, it is not an automatic answer to say that low fees are good. In fact, the search for the 401(k) "Holy Grail" of expenses is to find the right balance between fees and value. If a plan can spend a little more money and significantly increase the quality of participant vesting, the levels of deferrals, the participation rates, and the adequacy of the plan benefits, the money will have been well spent. That is value. However, value cannot be determined until there is transparency of costs and revenues so that the fiduciaries can properly evaluate the amounts of money being paid, directly or indirectly, for each service.

Several of the articles in this newsletter focus on these topics. If you want to know more, make sure to read those articles.

Learn more about Reish & Reicher's related practice areas:
Employee Benefits