2024 PS Webinar: The Evolution of QDIAs

For sponsors, assessing the value of a qualified default investment alternative which allows participants to build retirement income within a customized target-date fund requires understanding the total cost, not just the associated fees, said speakers at PLANSPONSOR’s 2024 Webinar: The Evolution of QDIAs.

Since passage of the Pension Protection Act of 2006, plan sponsors have sought ways to ensure participants are invested to accumulate assets for retirement. In recent years, more attention has been focused on using default investments, known as QDIAs, to minimize the risk of participants outliving their money in retirement.

Plan sponsor RTX Corp., which added lifetime income to its plan in 2012, presented the company’s learnings and explained some changes to the plan’s default QDIA via Ken Levine, its executive director of global retirement strategy.

“We just evolved to our second generation of lifetime income strategy this past fall, and with that, participants have the flexibility to choose a target retirement age,” he said. “While we’ve defaulted you in with age 65 [as a participant’s retirement age], you can choose a target retirement age anywhere between 60 and 70.”

At RTX, plan participants are defaulted into a QDIA with a customized TDF suite, called the Lifetime Income Strategy, which allows participants to allocate, when they reach age 65, a portion of their retirement assets toward an insured component, essentially purchasing the annuity.  

RTX also changed the “dial that participants have, [which controls] the [allocations to the] secure income” lifetime income program, Levine added.

The RTX plan was changed so individuals can now “can dial that [allocation] down,” Levine added.

“You can it dial down anywhere between 100% down to 0%,” which gives participants flexibility, Levine said. “If you dial it down to zero, essentially what you’re investing in is a highly customized target-date fund, [but] it’s based on your year that you want to retire, rather than picking a year within five that’s closest to your retirement age.”

Evolution of sponsors

Currently, plan sponsors are seeking the best ways to default retirement plan participants into a QDIA—generally comprising customized TDFs tailored to provide retirement income—with the most efficiency, explained Michael Esselman, vice president of investments at OneDigital Retirement + Wealth.

“Where I think we have fallen a little bit short … but it’s changing—and that’s why we’re talking about the evolution of QDIAs—is [attention to]: What about that red zone, [the] 10-to-15-year time before retirement?” Esselman asked.

RTX Retirement Income

In the RTX plan, building retirement income begins 15 years before retirement, with allocations to the secure retirement income portfolio.

“It adds a full percent—100 basis points—to the expense ratio when your money is in there, and that goes to the insurers,” Levine said. “You get a lot for that 100 basis points, but it definitely does increase the cost at that point where you start getting allocated to secure income.”

For sponsors, selecting the appropriate retirement income option for a QDIA is not just about the fees, emphasized Pam Hess, executive director at the Defined Contribution Institutional Investment Association Research Center. It is appropriate for sponsors to look beyond fees.

“You have to look at the value of what service you’re getting, not just the flat cost,” she explained.  

For sponsors to extract the optimal value, they must think about incorporating retirement income programs into their plan “holistically,” she added. “There’s this over-focus on fees, when it really is about getting the value, the most bang for your employees’ dollars.”

To illustrate her point about a holistic process, Hess quoted a plan sponsor who said to Hess, “We’re building a house, not just a room.” So when it comes to retirement income, sponsors must think about, Hess said, “How do [all the parts of the plan] fit together and connect?”