NEW YORK, October 24, 2007 -- Guidelines finalized this week by the Department of Labor (DOL) create significant opportunities as well as challenges for retirement plan sponsors who want to use the new “QDIAs” (Qualified Default Investment Alternatives) as the default investment option for retirement plan participants, according to Seligman Advisors, Inc.

QDIAs, created by the DOL in response to the Pension Protection Act of 2006 (PPA), relieve retirement plan sponsors of fiduciary liability for selecting a retirement plan’s default investment option. The DOL guidelines include target-date funds, balanced funds, and managed accounts as investments that qualify as long-term QDIAs.

“Many retirement plan sponsors will, for the first time, consider using equity securities in their default options,” said Charles Kadlec, President of Seligman Advisors, Inc. “Based on Seligman’s experience with plan sponsors since the PPA was passed, the decision in many cases may not be easy for exactly the same reason some investors get nervous when the market drops. For many people, the psychological pain of a short-term paper loss obliterates any faith that a long-term strategy will pay off.”

The key, Kadlec points out, is to understand the longer-term perspective on risk that is at the heart of the PPA. “The real risk that a plan sponsor must manage is the risk of a participant failing to accumulate enough wealth to retire,” he said. “That’s just as important as short-term risk for a simple, intuitive reason – many, if not most, participants in a plan’s default option are likely to hold their investments beyond one year.”

From there, a good starting point is to determine whether the plan will use a single default fund, such as a balanced fund, or offer multiple funds based on employee ages, he said, adding that whichever approach a plan sponsor chooses, target-date funds can offer a solution. For example, Seligman offers a suite of target-date mutual funds, Seligman TargETFunds, for an age appropriate solution. Alternatively, Seligman TargETFund Core, the end point of the series, serves as a stand-alone, diversified default investment; this Fund has already been adopted by more than 300 plan sponsors since the PPA was passed.

The challenge of choosing a target-date QDIA, Kadlec said, is that few target-date funds are alike and, although past performance is not a guarantee of future investment results, most lack sufficient track records to use for comparison. He offered three suggestions for evaluating target-date funds:

• Understand the glide path. The glide path is how a fund’s asset allocation changes over time, and is key to understanding a fund’s investment philosophy and process. For example, the glide path for the Seligman TargETFunds is based on research that shows the relative risk of asset classes changes as holding periods lengthen. The importance of understanding how a glide path was developed and how it is managed and rebalanced can dramatically increase the potential that participants will enjoy the long-term benefits of a well-crafted target-date strategy.


• Assess the underlying investments. How a glide path is implemented is as important as how it was developed. Most target-date funds use mutual funds as the underlying investments, which makes it fairly straightforward, although time consuming, to assess how closely a fund will replicate a glide path that is appropriate. Consider factors such as tracking error, style drift, and risk metrics with longer time frames in mind.


• Don’t rely solely on Modern Portfolio Theory. Statistics such as standard deviation and alpha are powerful tools, but they are based on short time frames and do not necessarily hold true for longer periods. Given that target-date funds are inherently long-term strategies, MPT metrics used in isolation can be misleading because they do not consider how the relative risk of asset classes changes over time. They also can mask the risk of losing the positive returns that prudent equity allocations historically have produced over time frames of 10 years and longer.

J. & W. Seligman & Co. Incorporated, a New York-based investment manager and advisor, was founded in 1864. As well as providing management and advisory services to institutional clients, the firm and its affiliates provide individuals with a broad array of investment options, including the US-based Seligman Group of Funds with more than 60 portfolios. Additionally, Seligman manages Tri-Continental Corporation, Seligman LaSalle International Real Estate Fund, and a closed-end municipal bond fund, which are traded on the New York Stock Exchange. Seligman also manages a range of offshore investments available exclusively for non-US investors. J. & W. Seligman & Co. Incorporated has an additional office in Palo Alto, California. Seligman Advisors, Inc. is the principal underwriter for the Seligman Mutual Funds. Seligman Services, Inc. provides client services to shareholders. Seligman Advisors, Inc. and Seligman Services, Inc. are each an affiliate of J. & W. Seligman & Co. Incorporated.