MINNEAPOLIS — The continued movement away from traditional defined benefit plans is making the default investment option in defined contribution plans more important.
According to a white paper by Wells Fargo Institutional Trust Services, Minneapolis, fewer defined benefit plans offered today make it critical that defined contribution plan participants allocate investments to achieve the best chance for adequate savings.
"Plan sponsors are recognizing that some of the responsibility for participants rests with them," said Shelia Cox, director of defined contribution services for Wells Fargo.
"The focus on prudence has escalated because of Sarbanes-Oxley. Plan sponsors are taking a hard look at all their practices and truly applied the best practices to the decisions that were made years ago. In the early '90s, stable value or money market funds were deemed the most appropriate, but that has changed," she said.
Asset allocation funds are the best method to address participant inertia, Wells Fargo found, because the funds are rebalanced regularly.
Ms. Cox said a recent study by the National Bureau of Economic Research found that nearly half of automatically enrolled participants remained in the default investment three years after enrollment.
"The target-date (allocation) funds are the perfect options. We have a better understanding of inertia on participant behavior and target-date funds help solve that," she said. The fund has a sliding scale that diminishes the equity allocation as the participant gets closer to retirement. The participant doesn't have to do anything with the fund (rebalance) so inertia doesn't impact the investment results.