Editor’s Note: This is the latest in a series of posts by speakers at the 2013 NAPA/ASPPA Summit, March 3-5, 2013 in Las Vegas. Richard A. Weiss of American Century discusses reevaluating existing retirement plans for a potential reboot using target-date products as a default investment option.
Defined contribution plan sponsors have an opportunity to improve retirement readiness for participants by rebooting their existing plan using target-date funds as a qualified default investment alternative (QDIA).
This is made possible by the Pension Protection Act of 2006, which gave certain diversified, long-term investment products QDIA status. Since 2006, a growing number of sponsors have made changes to their plans to incorporate target-date funds using reenrollment and auto-enrollment strategies. Rebooting a plan and auto-enrolling participants into a TDF allows employers to improve plan participation rates and overall asset allocation while also benefiting from the fiduciary protections laid out under QDIA guidelines.
Participants invested in target-date strategies are much more likely to have age-appropriate diversification and risk levels compared with employees who invest on their own. TDF investors have also been shown to have lower abandonment rates; that is, employees invested in target-date products tend to stay the course and not overreact to market events.
Plan participants in TDFs have a significantly improved likelihood of outperforming employees who go it alone. These factors make a compelling case for reevaluating existing retirement plans for a potential reboot using target-date products as a default investment option. American Century has written a white paper on the topic, which is available here.
Richard A. Weiss is an SVP and Senior Portfolio Manager, Asset Allocation Strategies, at American Century. His workshop at the 401(k) Summit, “Managed Account Bottom Line,” is set for Sunday, March 3, from 2:45-3:45 p.m.
