Barclays Pursues Company Match Market: Aims to Give Investors More Bang for Their Employer's Buck
October 22, 2007
While most 401(k) investors hardly give a thought to employer matches-and even employers usually don't promote them heavily to employees-an innovative investment solution from Barclays Global Investors of San Francisco specifically designed for company matches might finally generate some interest in this neglected company perk.
Asset managers are searching for the right default options that will help companies take care of their employees. Target-date funds are an increasingly popular default option for employees' contribution, but little has been done until now to address the company match part of the plan.
Barclays' SponsorMatch is an automatic enrollment investment option explicitly created for a company's matching contribution to an employee's 401(k).
Kristi Mitchem, head of defined contribution services at BGI, said the SponsorMatch fund has three main components. The first is an alpha portfolio aimed to deliver above-market returns. The second is a beta portfolio that seeks to match market returns, and the third is a deferred annuity.
Mitchem said the fund is a blend of all three components, with risk levels determined by the age of the participant and adjusted over time. The fund is designed to meet the Department of Labor's proposed regulations on qualified default investment alternatives.
"Historically, matching contributions have been invested in three sources: Company stock, cash or cash equivalent funds, or in a participant's investment choices," Mitchem said.
Paying employees in company stock is risky, she said, and cash payments often aren't invested properly, but a company match that mirrors an employee's selection can be just as dangerous.
"Most employees are ill-prepared to choose the best plan," she said. "Very few have the knowledge, interest or time to make an intelligent decision. Why double-down on a bad bet?"
A good company 401(k) plan should have positive outcomes that are automatic and easy to use, Mitchem added.
More than 75% of company 401(k) plans have automatic deferral percentages of 3% or higher, and plan sponsors provide matching contributions, on average, of 3% to 4%, she said.
Mitchem said even though the SponsorMatch fund becomes the default option for the company match, all participants will have the option to opt-out, in case an employee wants to actively manage their own portfolio.
Financial experts agree that even though investors know they should save for retirement, about half of them don't make the effort, and most don't seem to care or know how to invest their own money. That is why companies are increasingly automatically enrolling their employees in 401(k) plans.
"No matter how successful these plans are, employees are going to need to be bumped to a good default plan," said Pamela Hess, director of retirement research for Hewitt Associates in Lincolnshire, Ill.
"A quarter of employees don't even get into their company's 401(k) plan, and over a third of those in the plan don't [invest enough to fully] participate in the company match," Hess said. "Companies definitely need automatic enrollment to get the rest of the population into a plan and get them saving."
Hess said the idea of managing company matches is brand new and will probably take a few years to catch on. Most employers will probably wait to see how this new option evolves, she said. If SponsorMatch is successful, it could spur other companies to offer it to their employees, she said.
"Investors are passive," Hess said. "Employees don't know what to do with all these different plans, and they can easily get overwhelmed. The benefit to auto enrollment is that the plan is also automatically diversified and continually diversified."
Mitchem said she thinks employees will recognize and appreciate the benefits of SponsorMatch and that the program could help companies attract and retain more employees. "This is the first in a new category of investments designed to get the most out of the employer match," she said. "It will bring the best of pension plans to defined contribution plan participants."
Hess said the idea of an annuity in 401(k) plans is interesting, particularly when one considers that most employees don't stay with the same employer for their whole careers.
"The challenge is the transitory population," Hess said. "Will they be able to leave their money sitting there? Can you maintain an annuity in a rollover environment? At age 50, imagine how much you have accumulated." She added that in the past, annuities have gotten a bad rap for their excessive costs.
"Emotionally, it's very hard for people to give up their savings," she said. "About 15% of employers offer rollover annuities, but fewer than 1% of employees use it."
Lance Berg, an associate with BGI, said an investor who has SponsorMatch can transfer their balance to their new employer's 401(k) plan when they change jobs, keep their balance with their old employer and let it grow, or if their new employer also has SponsorMatch, simply move everything to the new plan.
Berg said BGI charges 85 basis points for SponsorMatch.
Barclays executives said the inspiration for SponsorMatch was the shift from companies providing pension plans to placing the burden of retirement planning on employees.
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