DCIIA Provides QDIA Selection Advice to Plan Sponsors

More defined contribution plan sponsors are, of late, looking to not only help participants save to retirement, but also continue saving through retirement. To meet this additional objective, qualified default investment alternatives are also evolving. 

The Defined Contribution Institutional Investment Association recently published an “action kit” for plan sponsors, as well as service providers and advisers, to follow when selecting the best QDIA for their plan. 

Since the Pension Protection Act of 2006, DCIIA found that QDIAs have become the largest asset gatherers in most defined contribution plans. Target-date funds, the most popular, are offered by more than 86% of plans, but there are an array of options that plan sponsors can take advantage of, and tailoring them to specific participants’ retirement needs could be a big help. 

When selecting a QDIA, DCIIA identified four main themes to consider: 

1. Participant objectives and outcomes through accumulation and decumulation phases; 
2. Ease of use for participants; 
3. Personalization at the plan and individual level; and 
4. Cost under continued downward pressure. 

DCIIA characterized off-the-shelf target-date funds as easy to use, a low-cost solution and easy to implement, as they are very widely used. Managed accounts offer more personalization but typically cost more and require participant engagement to provide data beyond what is automatically collected.  

Other emerging options, such as a hybrid or dynamic QDIA and personalized TDFs, are relatively low cost and can offer more personalization than a standard TDF. Managed accounts with a retirement income component are also an emerging option that offer personalized portfolios using automatically collected and participant-provided data. However, these tend to come at a higher cost. 

Plan sponsors can also consider TDF solutions with a retirement income component, as these tend to have a lower cost than a managed account, but they are less personalized and are age-based. They do offer the option to tailor a retirement income stream, and spending, to individual participants, DCIIA highlighted. 

DCIIA also came up with several questions that plan sponsors can ask themselves when evaluating their QDIA options.  

For example, plan sponsors should consider how retirement-ready their participants are: Are they on track? Does it vary by demographic? What do the participants’ allocations look like? 

Employers can also consider if the QDIA should have an embedded annuity at retirement as a potential way to provide guaranteed lifetime income. 

A recent Alliance Bernstein report found that incorporating lifetime income into a QDIA also keeps assets within a plan, and as a result, this might give the plan more leverage to negotiate with providers than an individual would have on their own. 

If a plan sponsor wants to provide a retirement income option in the QDIA, the sponsor should consider how retiree-friendly the plan is and how easy it is for retirees to use. Plan sponsors should also ask themselves how satisfied overall their participants are with the plan’s current default offering and if people are asking for additional features, according to DCIIA. 

When thinking about personalization, DCIIA suggested that plan sponsors evaluate what participant data points are available and were utilized in the portfolio construction of the QDIA. They should also consider that a provider of personalized solutions could retrieve data from the plan sponsor’s recordkeeper to avoid the need for participant engagement with the QDIA. 

Lastly, in terms of cost, DCIIA’s action kit recommended that plan sponsors consider if the sponsor would have an appetite for a higher-cost QDIA option if it potentially delivered better outcomes across demographics and served as a catalyst to engage more participants.