Pols Give Funds a Boost

The Department of Labor has yet to clarify rules regarding which types of funds are good default options, but Giltenan says lifecycle funds, target-date funds and other kinds of funds that adjust their asset allocations (from more aggressive to more conservative) as a specified date approaches are more appropriate.

Even before the passage of the Pension Protection Act, lifecycle funds were growing in popularity, but the law is expected to fuel further growth.

According to the ICI, assets in lifecycle funds were just $1 billion in 1997, but grew to $15 billion in 2003 and $70 billion at the end of 2005. About $48 billion of that $70 billion came form defined contribution plans and $15 billion was from individual retirement accounts. The remaining assets were outside of retirement accounts.

The autopilot plan could go a long way toward ensuring that investors save enough for retirement. A 2005 study by the ICI and the Employee Benefit Research Institute found that automatically enrolling employees in 401(k)s greatly increased participation rates, especially among lower-income workers. It also found that the default option selected for the plan can also have a major impact on the amount the employee accumulates before retirement.

The Pension Protection Act also fixes a flaw in 529 savings plans, which allow investors to defer taxes on funds earmarked for educational expenses. The tax advantages of this program were set to expire in 2010, meaning parents who opened a 529 account for their newborn when the program was created in 2001 could expect the benefits to vanish when the child was still in grade school. But the Pension Protection Act made the tax benefits of 529 plans permanent, which should encourage investors to keep using them.