Employers that automatically choose 401(k) investments for employees could face significant changes to those programs in the future, according to experts at Watson Wyatt Worldwide, a leading global consulting firm. A new regulation the U.S. Department of Labor is required to issue could lead many employers to move to equity-based funds when acting on behalf of employees who do not make investment selections, a considerable alteration for many 401(k) plans.
The new regulation, expected by mid-February, will lay out how certain provisions in the Pension Protection Act (PPA), which President Bush signed in August, should be implemented. Among the options the department is considering are rules that would effectively limit the types of investments that employers could make on employeesí behalf in individual-account defined contribution plans, such as 401(k)s. Proposed rules the department issued in November ó which serve as the starting point for the new regulation ó would not relieve employers of fiduciary liability if stable-value and money market funds were used as default options.
The rules are intended to complement the PPA provisions that allow and encourage employers to automatically enroll employees in 401(k) programs if workers fail to sign up on their own.
ìAutomatic enrollment and default investment programs can be a great help in providing more Americans with higher retirement savings,î said Mark Warshawsky, director of retirement research at Watson Wyatt Worldwide. ìBut they require employers to carefully consider the likely impact on contributions and administrative costs, and to assess whether any plan design changes are needed. Itís to employersí benefit to look at all ways to help employees to prepare for retirement. Otherwise, we may soon see a generation of workers that cannot afford to retire.î
In a recent survey of 95 employers with large defined contribution plans, Watson Wyatt found that nearly half (48 percent) of employers that currently make investment choices for employees would have to adopt different investment funds if the proposed rules became final. The survey also found that one-third of employers now automatically enroll employees in defined contribution retirement programs, and an additional 57 percent are considering adding the option in the future.
While automatic enrollment aims to address the issue of employees not signing up for their retirement benefits, employers that sponsor defined contribution plans said that employees are reducing their retirement security by taking loans from 401(k)s. For example, 58 percent of plan sponsors reported that the ability to take loans is driving down retirement savings and driving up administration costs.
Further information on the survey results can be found here
Pension act regulations could mean significant changes for 401(K) sponsors, Watson Wyatt says
Nearly Half of Surveyed Employers Would Have to Change Default Investment Programs
