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A Better Way to Default

With automatic enrollment quickly becoming a standard, companies are looking for better returns on the default options they offer 401(k) participants who don't like to choose

By Beth Karlin | Updated on December 28, 2007

Automatic enrollment is on a tear. After the federal government gave its blessing through the Pension Protection Act (PPA), a steadily mounting number of employers are signing up new employees automatically into 401(k)s to help them make sure they put enough away for retirement. But this also raises the fiduciary stakes for plan sponsors since most default options–the investments that participants are placed in when they fail to select one–have tended to offer only the lowest of yields, albeit accompanied by the smallest of risks.

The PPA took that into account too, by providing a working definition of qualified default investment alternatives, or QDIAs. And in Novemberthe Department of Labor identified three types of investment funds that qualify under the PPA as safe harbors: target-date funds, balanced funds and professionally managed accounts.

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