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November 16, 2009 12:00 AM

Defined contribution plans going under the microscope

P&I's DC West conference speakers working to restore faith in the system

Randy Diamond
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    Defined contribution plans will be the subject of intense scrutiny and proposed federal regulations over the coming months, speakers detailed at Pensions & Investments' West Coast Defined Contribution conference in San Francisco.

    A sense of urgency was apparent from plan executives attending and speaking at the conference earlier this month, who said they were increasing automatic enrollment and financial education as part of efforts to restore faith in the 401(k) system and help rebuild account balances.

    Their resolve was defined by the continuing reality that corporations are shifting away from defined benefit plans, increasingly leaving 401(k) plans as the sole retirement plan.

    Changes in Washington won't be radical, said James M. Delaplane Jr., a partner with Davis & Harman LLP, Washington. “This is not an administration which is saying we have to pull the 401(k) system out by the roots and replace it with something else,'' said Mr. Delaplane, a keynote speaker who opened the conference.

    Mr. Delaplane predicts changes will come exclusively from regulators, not Congress, in the next year. Legislators, he said, will be too busy with health-care reform, economic issues and the war effort.

    But as regulators get ready to toughen rules on disclosure of mutual fund expenses, fees and investment advice, plan executives and service providers already are eying change.

    Mr. Delaplane said a study from Hewitt Associates LLC found that 81% of large plan sponsors planned to review fund expenses and revenue sharing this year, while 73% expected to increase communications to participants on plan investments and fees.

    The first set of proposed regulations should come by the end of the year, Mr. Delaplane said.

    The Labor Department is also is expected to repropose rules – floated in the last days of the Bush administration and killed this year — that would have allowed wide latitude to financial firms in their ability to give investment advice to defined contribution plan participants. Mr. Delaplane said the new rules are expected put more restrictions on financial firms to give advice.

    Final fee disclosure regs expected from DOL in early '10

    Early in 2010, the DOL is expected to issue final regulations regarding the fee disclosures financial firms give to plan sponsors, he said, adding the DOL also will be issuing proposed regulations regarding the fee information sponsors give to plan participants.

    There will also be a large focus in 2010 by regulators from the DOL and the Securities and Exchange Commission on target-date funds, he said.

    He said regulators are evaluating plan marketing material to determine whether it is confusing for participants.

    While Mr. Delaplane doesn't see new legislation on defined contribution plans in 2010, he predicts that will change in 2011, when congressional Democrats and the Obama administration are expected to focus on reducing tax deductibility on 401(k) plans for upper income individuals. Tax breaks to participants of retirement plans cost the federal government $139 billion a year, the biggest item in the budget, Mr. Delaplane said. He said the government hopes to recover part of it by targeting the retirement accounts of wealthier individuals. Individual filers making more than $200,000 and joint filers above $250,000 would be affected by the changes, Mr. Delaplane said.

    That change, he said, will be part of deficit reduction. Pretax treatment of participant contributions might also be subject to change by Congress in 2011, he said, with middle- and lower-class plan participants allowed a flat 25% deduction after taxes, Mr. Delaplane said.

    The likely lack of any legislative action this doesn't mean that key legislators won't be pushing their agenda.

    U.S Rep. Rob Andrews, D-N.J, chairman of the Health, Employment, Labor and Pensions Subcommittee of the House Education and Labor Committee, has been pushing for legislation increasing fee disclosure and tightening conflict-of interest rules on investment advice.

    While the legislation has cleared Mr. Andrews' panel, and could pass the full House this year, Mr. Delaplane said the bill is dead on arrival in the U.S. Senate.

    Mr. Andrews, who spoke by video recording at the conference, said he wants consumers to get clear advice, but doesn't want overwhelm them. “I don't want the drinking-from-a-fire-hose problem when we feed the individual with so much info that they can't make a rational decision about their investment option,'' he said.

    Financial education, target date funds, get airtime by plan sponsors

    Patti Yurkovich, director, retirement and compliance for US Airways Inc., Tempe, Ariz., told attendees the market mayhem has made participants more eager for investment advice. She said US Air will increase financial education in 2010 for participants in its $2.9 billion DC plan.

    The self-imposed reviews by plan participants and sponsors come as the Department of Labor is expected to issue final regulations early next year for service providers on fees disclosures, said Mr. Delaplane. He said the regulations would go into effect in 2011.

    Among the plan executive panelists, Judy Mares, chief investment officer for Alliant Techsystems Inc., Minneapolis, said defined contribution plans should be driven off a target income replacement rate, a rate that participants should pick.

    Ms. Mares said ATK officials are restructuring the array of active and passive funds it offers participants, because there are too many offerings and it is too complex. She also said ATK's $2.9 billion DC plan needs to add a “real return” investment option, such as Treasury inflation-protected securities or commodities, or a combination of them.

    Solid defined contribution plans can be viewed as not only benefiting employees, but also serving a company by helping with retention, said Rich Floersch, chief human resources officer at McDonald's Corp., Oak Brook, Ill.

    Mr. Floersch said participation in the company's $2 billion 401(k) plan had been low, especially among minority managers. Officials improved participation by instituting automatic enrollment and increasing the company match. As a result, the participation rate for African-American store managers increased to 71% from 44% between the end of 2005 and the end of 2007. During that same period, Asian manager participation grew to 74% from 51% and Hispanic manager participation, to 81% from 64%.

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