Cynthia Egan, president of T. Rowe Price Retirement Plan Services Inc., Baltimore, took the reins of the firm the third largest defined contribution provider at a time that cannot be more exciting, she said. The Pension Protection Act of 2006 has changed the landscape for defined contribution plans. The PPA, by encouraging automatic enrollment, will shape the investments selected and affect participant savings levels like no other initiative. This is a tremendous time for DC, she said.
Ms. Egan joined T. Rowe Price in May after Charles Vieth retired in late 2006. In her role, she leads the divisions providing investment management, record keeping, client servicing, participant education and compliance services to roughly 3,000 plans with more than 1.5 million participants.
Before joining T. Rowe Price, Ms. Egan worked as executive vice president of Fidelity Investments, Boston, where she helped develop Fidelitys post-retirement service, Fidelity Retirement Income Advantage. Ms. Egan also was executive vice president of Fidelity Institutional Tax-Exempt Services Co., where she oversaw workplace retirement savings for tax-exempt organizations, and president of the Fidelity Charitable Gift Fund, the nations second largest public charity.
What is the single biggest trend in the defined contribution industry right now? The really big milestone at the moment is the (Pension Protection Act). The last significant legislation was 1974 with the Employee Retirement Income Security Act. Now with the PPA, its a strong signal to the industry that things have changed. I cant stress enough what an impact the PPA has had already and will continue to have. I think its obvious that automated solutions are the biggest story coming out of the PPA. We have about 40% of clients taking advantage of automated solutions like automatic enrollment and auto deferrals. Its safe to say that that number will skyrocket. A lot of sponsors were waiting for the safe harbors that the PPA guarantees.
What do you think about the Qualified Default Investment Alternatives?
We are very supportive of target-date funds as a default option. Over a third of employees in our plans are not participating and not maximizing their deferrals. We created millions of savers, but not investors. I think target-date funds solve many problems for a large segment of the participant population. It is a decision that plan executives should and do take very seriously, which default to offer.
How much in target-date fund assets do you hold? We have in excess of $20 billion in target-date assets. We do expect it to grow significantly after the QDIAs were passed. A lot of plan sponsors that add auto enrollment are looking at target-date. I honestly see that continuing.
Do you think managed accounts make sense as a QDIA? I think managed accounts absolutely make sense for certain individuals, but it requires action on the part of the participant, which could be problematic as a default. It remains a good option for some participants. For those participants who have larger account balances and look carefully at the fee side, it does make a lot of sense. And we offer managed accounts through a third party. Plans could offer managed accounts as a default if they choose.
Defaulting into stable value is not a good idea. Plan sponsors have worked really hard to get participants to invest properly, through education. For those participants who remain in stable value, its a worst-case scenario. And some participants that are defaulted into a 401(k) plan will simply not take any action. It could have dire consequences on their balances. Stable value can be a great asset class for participants as part of a diversified portfolio, but I agree that it should not be a QDIA. The (Department of Labor) made a good decision.
Is investment advice an important part of T. Rowe Prices education offerings? We believe we need to provide it to participants, and we choose to offer it through a third party. There is a segment of the participant population that will proactively take advantage of it and we see a good degree of utilization. When advice is offered to a plan, 10(%) to 30% of participants will utilize it. Of those that use it, 97% use it online and 3% use managed account services. Its a very important program to offer. But education does not stop there. Our plan sponsors do a great job reaching out to participants through meetings and paper and the Web. Advice is part of a multitiered (education) campaign.
Is T. Rowe Price considering offering direct investment advice? We are comfortable right now with a third party, but I couch that with right now. I cannot say what we are planning, but we will look at all options going forward. We use both Morningstar (Associates, Chicago) and Financial Engines (Inc., Palo Alto, Calif.) for advice. We want to give participants a choice in providers. And for managed accounts, we use Financial Engines.
Where do you stand on fee disclosure? We have been in support of fee disclosure for years, but with caution. Too much disclosure could create confusion among participants. We as a provider, and in working with plan sponsors, do not want to create more questions and concerns. There has to be a balance between providing appropriate disclosure and not overloading participants. We have always been proactive and our plan sponsors are comfortable with what we disclose as a provider. I honestly think the majority of plan sponsors are doing a great job in figuring out how much they pay and to whom, and how much to show participants. There are many pieces to this puzzle and sponsors are doing a great job.
With all this talk of the DBing of the DC industry, do you think annuities are the answer? The real issue is the distribution phase for us in providing a stream for baby boomers. In some instances, annuities can be appropriate. There is a lot to think about as a provider, whether you want the annuity in or out of the plan, whether the fees are worth it for participants and so on. I think plan sponsors have to take careful consideration of the fees associated with annuity products out there.
Do you offer any annuity options? We work with Heuler Cos. as our annuity referral service. I think there has been a lot of interest, but there are many other products that can be offered. Its a big area of interest for us and the rest of the industry.
Where do you see T. Rowe Price in five years? First, I think you will see steady, measured growth from us. We are also putting a tremendous amount of careful thought and consideration into the retirement income phase. I think we will emerge as a leader in the retirement income phase.
What do you have planned as far as retirement income products? I really cant say, but we are spending a lot of time and energy on what makes sense for DC plans. We all agree that retirement income is one of the biggest trends out there. You will see products from us soon.
What keeps you up at night? We need to make sure the system is understood. There is a steep learning curve and we want to help participants achieve clarity. When it comes to legislation and regulations, we have to make sure were effective. Its simple. We need to offer the best products possible. Again, retirement income is the next wave and you will see great things from us.