QDIA rules expected to have widespread ramifications

The new regulations from the Department of Labor covering qualified default investment alternatives will have widespread ramifications for both financial advisers and insurance companies. Industry observers said that advisers will have more responsibility for, and become more important in, directing 401(k) plans because the Labor Department gave them the green light to customize and create their own underlying funds as a QDIA. However, it will be a bigger challenge for the insurance industry, which lost the ability to use stable-value accounts as QDIAs. But observers predict that insurers will use other products in 401(k) plans, such as target date funds and managed accounts, so that they can offer automatic enrollment to plans. Last week's announcement from the Labor Department was a landmark decision that will rock the industry, insiders said.
"The change is, the adviser becomes more important than ever in the investment piece in the 401(k) plan," said Peter Kapinos, senior vice president of retirement plan marketing at Putnam Investments, a Boston-based asset management firm. The Pension Protection Act of 2006 allows plan sponsors to enroll employees automatically in a QDIA if the participant fails to provide an investment choice and doesn't opt out of the 401(k) plan. For months, the insurance industry battled for the Labor Department to allow stable-value accounts to be a designated QDIA option. The Labor Department allowed target date and lifestyle funds, as well as a professionally managed account and products with a mix of investments such as balanced funds, to be QDIAs. To cushion the blow for insurance companies, the Labor Department added a grandfather clause that allows previous stable-value ac-counts to be exempt from lawsuits. It also will allow capital preservation products, which include stable-value accounts, for participants in the first 120 days of a new employee's being enrolled. "This is a blip," said Jack Dolan, spokesman for the Washington-based American Council of Life Insurers. "I can say that the life insurance industry is smart, nimble, and we've been around a long time." Already, insurance companies have teamed up with other companies to offer a managed-account product, which was given the blessing as a QDIA. In fact, even before the regulations were announced, Tim McCabe, senior vice president of PMFM Inc., had begun partnering with insurance companies to offer a product that can be used as a QDIA. So far, the Watkinsville, Ga.-based independent registered investment advisory firm has teamed up with The Guardian Insurance and Annuity Co. Inc., a division of The Guardian Life Insurance Company of America in New York, and it has plans to partner with Lincoln National Life Insurance Co. in Philadelphia and Mutual of Omaha (Neb.) Insurance Co. PMFM, through its 401k Toolbox product, offers a managed-account product that insurance companies can use as a QDIA in conjunction with their own 401(k) offerings. Already, more than 30 companies have chosen to offer the company's QDIA product. "I think insurance companies are positioned well regardless of being able to offer stable value or not," Mr. McCabe said. Many insurance companies have plenty of options, particularly in the target date area, said Fred Reish, managing director of Reish Luftman Reicher & Cohen, a Los Angeles law firm. "A lot of insurance companies have mutual-fund-affiliated target date accounts," he said. "They have much more freedom to develop something really interesting and really successful." So far, industry leaders don't predict that many companies will use low-risk funds as QDIAs for the first 120 days, because it would require that participants be shifted to another QDIA. The 120-day option will be popular only among certain employers with high turnover, said Larry Goldbrum, general counsel of the Simsbury, Conn.-based SPARK Institute, which represents the retirement services industry. "The only situation where any employer would want to do that is if they have a highly transient group and a long-term fund they believe would be volatile," he said. "Other than that, why would you want to set up two funds to accommodate people who will likely opt out in general?" What remains one of the biggest opportunities for advisers is the ability to customize funds and use those offerings as QDIAs, Mr. Reish said. Some advisers don't like target date options and can make their own models. Advisers and consultants have found that creating their own models is cheaper and often means better alternatives to participants, Mr. Reish said. "When you're using an institutional-class share rather than retail, it's so much cheaper, it's not even funny," he said. "You can save a ton of money for participants." It has become more popular in the midsize market for advisers to create their own models. It allows them to spend more time with participants, Mr. Reish said. Benjamin Hill, a financial adviser with Blueprint Financial Corp. in Beachwood, Ohio, agrees. Mr. Hill, whose firm oversees $250 million, said he often customizes funds for employers. "As an adviser, we're the closest to the plan sponsors, and we're the closest to the participants, and it enables me to craft a more customized solution," he said. John Ring, managing director for retirement plan services for Berwyn, Pa.-based Brinker Capital Inc., said he thinks that advisers will be able to do more than just educate participants about the choices, thanks to the QDIA options. "I think this is tremendous for advisers," he said. "I think more and more participants are looking for advice." Brinker offers a managed-account product for participants. Mr. Ring said he thinks that employers may be slow to use a QDIA, but he said that once they truly understand the option, they will grab hold of it. Lisa Shidler can be reached at lshidler@crain.com.