The Markets June 15, 2007

A 401(k) without Single Strategy Funds?

“I would love to see people offer both [lifestyle and lifecycle funds] in their platforms;″ take away all the single-strategy stuff".
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“Default people into a target date, but let them change to a target risk fund if they want,’ continued Barbara Novick, Vice Chairman at BlackRock.commented, speaking at a luncheon where the firm introduced its nine new lifecycle portfolios (See Lifecycle Arena Grows With New BlackRock Funds). As the pace of growth continues among asset allocated funds, both lifestyle and lifecycle, Novick predicts fewer plans will include single-strategy funds on their menu, she said.
BlackRock has offered four lifestyle (risk-based) funds since January and, while lifestyle funds make more sense from a pure investment standpoint, Novick said. However, part of the problem with target risk funds in defined contribution plans, according to Doug DuMond, Managing Director, Head of U.S. Defined Contribution at BlackRock, is that too many participants don’t know what profile they fit.
Lifecycle funds are a “brilliant invention,’ Novick said, not only because they make sense with reality, but since sophisticated employees might want access to a lifestyle fund to better manage his financial situation, BlackRock intends to continue to offer both.
Moving Forward
“The growth we’ve seen in DC is nothing compared to the growth we’re going to see,” Novick commented.
DuMond agreed: although the current defined contribution assets under management (AUM) per asset class shows 20% or more each in large US equity, GIC or stable value, or company stock, a decaded from now – specifically taking into account the likely effects of automatic enrollment and escalation, and the use of qualified default investment alternatives (QDIAs), more than half of DC money could be invested in those funds he said. However, he cautioned, participant communication and advice efforts should continue while implementing automatic enrollment and automatic escalation.
Post PPA, there are four critical issues to consider when working with defined contribution plans, DuMond said:
  1. Decide whether or not to institute automatic enrollment and other PPA features
  2. Evaluate the importance and impact of qualified default investment alternatives (QDIA)
  3. Develop an on-going investment policy and fiduciary review process, as well as investment search and evaluation for QDIA investments, similar to the role treasury and finance areas have traditionally adopted with regard to defined benefit plans
  4. Analyze DC administrative and investment services along with expenses on a de-coupled basis, i.e. make a QDIA decision separate from the recordkeeping decision

QDIAs

Citing a 2007 study by Callan, DuMond said that most plan sponsors surveyed (70%) say they are interested in target date funds as a qualified default investment alternative (QDIA), and when they select that fund, the most important criteria for about half (52%) of the large plan sponsors surveyed was the portfolio construction, while only 3% said the most important criteria was the proprietary funds of their DC recordkeeper. This means that plan sponsors will not necessarily “default on their default options,’ DuMond said.
This, although good for asset managers such as BlackRock, might be an interesting dynamic for the recordkeepers, he suggested. In a bundled environment, recordkeepers are able to decrease the costs for their administrative services because of the strong growth they have in their proprietary funds, DuMond said. Bringing non-proprietary QDIAs into a plan might upset these economics, as recordkeepers might have to increase the fees for service to offset the losses from not having its proprietary funds used in the plan.

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