Auto enrollment, default options hot topics at conference

SAN FRANCISCO — Automatic enrollment and appropriate default options dominated the conversations at Pensions & Investments' recent conference.

These topics and other reactions to the provisions of the Pension Protection Act were at the top of the charts for P&I's ninth annual Defined Contribution/401(k) West Coast Conference Oct. 8-10 in San Francisco.

James M. Delaplane Jr., a partner at the law firm of Davis & Harmon LLP, Washington, opened the conference with a review of Washington's new pension law.

"The advice provisions have been oversold. There was a lot of noise and activity around advice, but most (plan sponsors) will be sticking to the advice provisions they had prior to the PPA," said Mr. Delaplane.

The most important provisions of the PPA were not the advice provisions, but the clarifications regarding automatic enrollment and the permanent adoption of DC deferral provisions. The provisions, first spelled out in the Economic Growth and Tax Relief Reconciliation Act of 2001, included increased limits on deferrals, the removal of deferrals from calculations of maximum deductible amounts and the addition of a Roth 401(k) feature for deferrals.

In a breakout session on automatic enrollment, Carol Waddell, director of product development at T. Rowe Price Retirement Plan Services Inc., Baltimore, said many plan sponsors will revisit automatic enrollment now that the PPA has been signed.

"Some plan sponsors that enacted auto enrollment at (a 3% default allocation) will now bump it up to 6%," she said, adding that those types of changes will become more common.

Cindy Conway, group director of compensation and benefits for Cadence Design Systems Inc., San Jose, Calif., and a member on one of the panels, said the company's $450 million plan will add automatic enrollment in January.

There was also discussion about appropriate default options for automatically enrolled employees.

Jonathan Rose, benefits supervisor for Silgan Container Corp., Woodland Hills, Calif., said: "We will be moving over to age-based (lifecycle) funds soon. … We currently use a capital preservation fund, which is a ‘no harm, no foul' fund. We want to do something more now." The $50 million 401(k) plan has offered auto enrollment since 2001.

Stuart O'Dell, director of retirement investments for Intel Corp., Santa Clara, Calif., said plan officials are big fans of lifecycle fund strategies, which the $3.5 billion plan rolled out in 2004.

"We're now looking at alternatives for our (custom-made) lifecycle funds. I can see us adding an alternatives sleeve," said Mr. O'Dell.

Managed accounts received a separate look both as an investment option and as a default option for automatically enrolled employees.

In a breakout session on managed accounts, Lori Lucas, senior vice president and practice leader at Callan Associates, San Francisco, said, "They're easy and convenient for employees, they are personalized and there is ongoing monitoring and rebalancing of accounts."

Ms. Lucas cautioned, however, that managed accounts lack significant track records and require additional fees paid by participants. Plan sponsors also might not like the probable recommendation of reducing the amount of company stock held.

Luke Collins, executive vice president at ProManage LLC, Chicago, said all but six of the firm's more than 50 clients use their managed account option as a default.

Christopher Jones, chief investment officer for Financial Engines Inc., Palo Alto, Calif., said managed accounts will gain more acceptance as a default option now that the Department of Labor issued proposed guidelines that included managed accounts among acceptable default options.

"We currently have 70 clients that use our managed account platform. We will see these options playing a larger role for more plans," said Mr. Jones.

Charles "Ed" Haldeman, chief executive officer at Putnam Investments, Boston, delivered the keynote address, in which he outlined mistakes 401(k) plan participants make.

"Taking a look at participant behavior, participants typically make four mistakes: low deferral rates; poor understanding of risk and return; poor asset allocation; and many are not prepared to manage their income in retirement," said Mr. Haldeman.

Mr. Haldeman also talked about the need for DC plans to take their lead from DB plans for better investment solutions.

"DC plans need to be smarter about alpha and beta. And plan sponsors need to focus on risk efficiency, not just high returns, when it comes to manager selection," he said.