Investing March 18, 2024

2024 PS Webinar: The Evolution of QDIAs

For plan sponsors, assessing their participants’ desire for both retirement income and customization are the next frontiers for target-date-fund offerings.

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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.

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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?”

Data and Research March 18, 2024

Millennials Define Retirement as Time of Greater Flexibility, Not Workforce Exit

While Millennials are moderately confident they will have sufficient retirement savings, many suffer from ‘money dysmorphia,’ new research shows.

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Millennials are “redefining” what retirement means, according to a new survey conducted by IRALogix Inc., a retirement industry fintech provider, as more than half believe retirement is defined not by age 65 but by “financial independence.” 

While some Millennials said ceasing all work by age 65 is a goal they are highly focused on working toward, many said they view retirement not necessarily as complete exit from the workforce, but rather a “time of greater flexibility in their lives.” 

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When asked if they see themselves retiring at some point, 47% of Millennial respondents said they will retire as soon as they can afford it, and 22% said they will keep working, either because they “enjoy it or [because they] don’t have sufficient retirement savings.” 

IRALogix conducted a February survey of Millennials, aged 28 to 43, with a wide range of household incomes.  

Overall, IRALogix found that Millennials were moderately confident they will accumulate sufficient savings to retire at some point, but 29% said they have no confidence in their ability to save enough to retire. 

The majority of Millennials held themselves accountable for ensuring they have sufficient retirement savings, while 25% said their employer is responsible and 20% believe the government should provide their retirement savings.  

Of those who answered “employer” as the party that should be held accountable for their retirement savings, almost one-quarter of respondents said they wanted a traditional defined benefit plan with investments selected by investment professionals, in which the employer assumes all the risk and is required to pay the employee a fixed monthly sum in retirement.  

Money Dysmorphia 

A recent report by personal finance company Credit Karma LLC also found that many Millennials and younger workers in Generation Z are experiencing “money dysmorphia”—defined as having a distorted view of one’s finances that could lead to making poor decisions. According to Credit Karma, this problem is more pronounced among younger generations, with 43% of Gen Z and Millennials saying they experience money dysmorphia. The Credit Karma study was fielded between December 18 and December 26, 2023. 

Of those who experience money dysmorphia, nearly half (48%) of Gen Z and 59% of Millennials said they feel behind financially, likely contributing to feelings of financial inadequacy. However, 37% of respondents who report experiencing money dysmorphia reported having more than $10,000 in savings, with 23% of those having more than $30,000 in savings. According to Credit Karma, those amounts are well above the median amount of savings for Americans, which hovers around $5,300. 

Respondents to the Credit Karma survey said money dysmorphia negatively impacts their finances, and of those, 40% said dysmorphia has held them back from building savings or led them to overspend and take on more debt. 

However, IRALogix’s survey showed that Millennials appear to be able to contain their consumer debt reasonably well, despite these feelings of financial inadequacy. For example, 55% said they have between $0 and $20,000 in debt, excluding their mortgages; 18% have up to $35,000 in debt; and 11% said their debt exceeds $65,000.  

When it comes to balancing short-term financial goals—like vacations, buying a home and paying down student loans and other debt—with saving for retirement, 62% of Millennials indicated they try to “strike an even balance between the two.” The survey revealed that 61% of Millennials are making regular contributions to an employer-sponsored plan like a 401(k), 403(b), SIMPLE IRA or a SEP IRA. 

‘Playing Defense’ 

Northwestern Mutual’s 2024 Planning and Progress Study, conducted between January 3 and January 17, found that 42% of U.S. adults feel 2024, given current market and economic conditions, is a year to prioritize “playing defense” with their savings and investments. 

Gen Zers and Millennials were the most likely to say they would add a side hustle to build more savings, whereas a high numbers of high-net-worth individuals—people with more than $1 million in investable assets—reported moving into safe, high-yielding instruments like money market funds. 

At the same time, Gen Z respondents were the most likely of all generations to say they will increase non-essential spending, whereas Gen X respondents were the most likely to say they will be tightening their belts. 

According to Northwestern Mutual, the main drivers of financial stress for respondents in 2024 are expected to be inflation, followed by “government dysfunction,” the U.S. presidential election and a potential recession. 

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