A new whitepaper argues that qualified default investment alternatives (QDIAs) need to evolve to provide a best-in-class solution to better prepare participants for retirement.
In Willis Towers Watson's “QDIA evolutions – Moving defined contribution plans into the future,” author Jason Shapiro contends that employers should consider more comprehensive answers beyond the three QDIAs the Department of Labor currently permits sponsors to choose from (target date funds, managed accounts and balanced funds).
“We believe through combining the three allowable QDIAs in thoughtful ways, and utilizing available features and systems innovatively, sponsors have the potential to create new solutions that meet the definition of a QDIA and help improve outcomes for participants,” writes Shapiro, who is a leader in Willis Towers Watson’s DC Strategy and thought leadership.
Moving Beyond TDFs
Shapiro observes that TDFs have been the dominant force among the three potential QDIAs and generally do a number of things well, including addressing asset misallocation, streamlining participant decision points and reducing costs through scale. Moreover, he notes that plan sponsors, advisors and managers have done an “admirable job” of advancing TDFs to the extent possible, mainly through evolving glide paths, lowering costs and adding marginal diversification.
That said, Shapiro argues that TDFs are being called on to do more than they ever have in the past – to be a retirement readiness vehicle for a heterogeneous population of plan participants. “We need to critically ask ourselves as an industry whether target-date funds are up to the task. If not, we should consider what the next step for QDIAs should be,” he states.
Three Approaches
Shapiro outlines three approaches sponsors should consider:
- Hybrid solutions – a low-cost generic asset allocation vehicle that transitions to a customized managed account later in a participant’s career. Shapiro notes that the hybrid approach aims to combine the low-cost, efficient asset allocation process of TDFs (or similar asset allocation vehicles) and the benefits of customized advice in managed accounts.
- Unwrapped TDFs – a combination of traditional model portfolios and custom TDFs. Here, the plan sponsor or third party would create a custom glide path that could factor in the sponsor’s plan design, participant demographics and behaviors, and the sponsor’s investment beliefs. Once designed, the plan’s core lineup would be mapped to model portfolios, which could then be used to create “appropriate portfolios” at various participant ages, Shapiro explains.
- In-retirement, income-focused solutions – converts participants plan balance into retirement spending through features that may include Social Security deferrals, deferred annuity purchases, non-guaranteed spending and others.Shapiro notes that these characteristics are not meant to be prescriptive but rather demonstrate valuable features his firm believes may be integrated into a holistic QDIA solution that are generally lacking today.
Shapiro acknowledges that all three QDIA solutions are still in their infancy and need to progress further before plan sponsors start adopting them. Still, he contends that evolution is necessary as TDFs include implied, and often unintended, consequences such as bundled decision making and loss of scale in core lineups, while managed accounts are not an ideal fit for default participants.
He also observes that when asked about the specific retirement income factors they consider important, many individuals noted access to additional funds, possibility for growth, investment flexibility, automatic stable payments and guaranteed income components. “Many of these objectives conflict, so in order to address the desires of participants, sponsors should consider how features may be utilized in a dynamic QDIA and how those pieces interact to provide participants with a customized solution that meets many of the desired criteria,” Shapiro recommends.
