Sponsors of 401(k) plans might be reluctant to change the default investment options they use to automatically enroll employees, despite regulatory safe harbors, said a Government Accountability Office report released Friday.
GAO analysts reviewed three annual industry surveys from 2009 through 2013, and found that most 401(k) plan sponsors reported using a target-date fund as their default, while fewer plan sponsors reported using the other two default investment types identified as safe harbors by the Department of Labor. In 2013, 60% to 72% of sponsors used target-date funds, while roughly 15% used balanced funds and 7% to 12% used managed accounts.
Plan sponsors responding to a GAO questionnaire said that after an extensive default selection process, some might be reluctant to change the default investment when new products come along, citing regulatory uncertainty, liability protection and the challenge of adopting innovative products as significant challenges.
Plan sponsors responding to the questionnaire and stakeholders interviewed by GAO said the DOL’s qualified default regulations were unclear in several respects, including how sponsors can factor participants’ ages into their default investment selection; whether default investments provided equal levels of protection; and whether they can incorporate other products, such as those offering guaranteed retirement income.
“Such uncertainty could lead some plan sponsors to make suboptimal choices when selecting a plan’s default investment that could have long-lasting negative effects on participants’ retirement savings,” said the GAO report, which recommended that the DOL consider how the concerns might be addressed.
“Given the challenges that sponsors and stakeholders reported, there should be some actions taken by Labor,” said Charles Jeszeck, director of GAO’s education, workforce and income security team, in an interview.
In an Aug. 10 letter responding to a draft report, Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, said the department welcomed the GAO suggestions and will assess the challenges. “We will consider whether a broader public comment process … or a research project would aid that assessment,” and whether other actions would benefit stakeholders, Ms. Borzi wrote.
