By most accounts, target-date funds are the predominant default investment vehicle on most 401(k) plan menus today. But this week we asked NAPA Net readers about the qualified default investment alternative (QDIA) they primarily recommend, and why.
Not surprisingly, TDFs did indeed dominate the responses, cited by nearly six-in-ten as their primary QDIA recommendation. Balanced funds were the primary choice of 19%, while managed accounts were cited by just under 15%.
As for the allure of TDFs, one reader noted, “There is certainly no ‘one-size’ fits as far as QDIAs are concerned but my experience has been that target date funds and the ‘auto pilot’ concept is generally the most widely accepted and adopted by plan sponsors and easily understood by the average participant.”
A ‘Better’ QDIA?
But what about the notion that managed accounts are a “better” QDIA (see Managed Accounts: A Better QDIA?)? One respondent explained their reluctance to recommend managed accounts this way: “I have yet find a way to equate the ‘value’ managed accounts provide vs. the fees. It seems as if the sales reps for the record keepers who partner with an independent provider of managed account services are not well-educated about the service. They don't have much to share with the advisor to help demonstrate ‘value.’ Managed account services seems to be an afterthought in the sales process (typically, ‘yes we offer managed accounts, who provides the service, it qualifies as a QDIA and the fee’).”
Still another said “Managed accounts are still too opaque and not efficient for small plans. TDFs are still relatively new as far as operational history, economic/investment cycles compared to existing balanced funds.”
Another reader explained, “Managed accounts are too expensive and chances of an employee entering personal data, investment objectives, outside assets etc. is slim. The additional cost is not worth the benefits or lack of benefit. The idea is great but the rank and file won’t do it. We have a hard enough time even getting them to understand the importance of saving, let alone taking additional investment allocation steps.”
Still another noted, “In recent years it seems that almost all participants are electing the TDF. Participants have a hard enough time understanding the plan — they don’t want to understand investments and fees.”
Why TDFs?
As for why they were inclined to recommend that default option, the most common response was that it was the easiest to add/implement (28.57%), with “it’s the most cost-effective alternative” (noted by nearly 24%) close behind. Nearly one-in-five (19%) said that their rationale was that “it can be implemented without participant interaction,” while 14% each laid it at the feet of their customers — that that was what the plan sponsor or participants expected.
“Better disclosures from managed accounts providers about their questionnaires, methodologies for constructing the model portfolios (including assumptions, risk/return, conditional VAR, etc.), how much ‘personalized’ work they really do vs. directing account to a limited number of portfolios), how they interact with participants (if other than on-line questionnaires)” was one reader’s suggestion for how to improve the attractiveness of managed accounts as a QDIA.
Beyond that, asked to identify what, if anything, would lead them to shift their current recommendation, changes in regulation were cited by more than half, but changes in fees would motivate change by a quarter of respondents, while changes in fund structure or plan sponsor demand were (each) noted by about one-in-eight.
However, a full quarter indicated that none of those factors would lead them to change their current QDIA recommendation.
Those insights notwithstanding, as one reader reminded us, “one size does not fit all; the QDIA should fit the plan, not the trend.”
Thanks to everyone who responded to our reader poll! Got something (else) to say? Use the comments section below!
