How Hybrid QDIAs Could Be Beneficial to Participants

Whether structured as a hybrid QDIA or not, experts agree managed accounts can be complementary to TDFs in a DC plan’s investment menu.

By Rebecca Moore | July 28, 2017
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There are different ways the industry is defining hybrid qualified default investment alternatives (QDIAs), but generally it is when a certain segment of a defined contribution (DC) plan participant population is first defaulted into one vehicle, and then later defaulted into a different vehicle when certain triggers are met, according to James Martielli, head of Vanguard Defined Contribution Advisory Services, in Malvern, Pennsylvania. The triggers for changing defaults could be account balance or age.          

Holly Verdeyen, senior director, defined contribution strategy at Russell Investments in Chicago, adds that a hybrid QDIA blends multiple types of QDIAs, such as a target-date fund (TDF) or balanced fund with a managed account. For example, she says, a younger participant may be defaulted into a TDF or balanced fund then moved to a managed account based on age or what she calls “funded status,” which is the amount of income replacement in retirement the participant’s account balance would provide.

“TDFs and balanced funds tend to keep static allocations until participants are in their late 30s or early 40s, then derisking occurs,” Verdeyen says. She notes that an age trigger would probably be 10 to 15 years prior to retirement, and a funded status or account balance trigger would be when someone is approaching fully funded status based on their retirement income need. “A managed account can preserve that funded status better than a TDF,” she contends.

According to Verdeyen, a properly structured managed account will be able to adapt to changing participant circumstances and market conditions; if market conditions lower a participant’s funded status, a managed account could adjust for that. Likewise, if market conditions improve a participant’s funded status, a managed account could derisk, like a pension plan, to preserve the higher funded status. “A TDF will keep rolling on its glidepath, but a managed account could change with market conditions,” she says.

As for participant circumstances, Verdeyen notes that if a participant gets a raise, which would help his or her funded status, a managed account portfolio could be adjusted. The same is true if the participant stopped contributing to the plan, hurting his or her funded status.

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