What Should Plan Sponsors Consider When Selecting a Dynamic QDIA?

As dynamic qualified default investment alternative are gaining interest with plan sponsors, panelists on a Morningstar webinar discussed the benefits of more personalized investment advice, as well as how a plan sponsor can go about selecting the right QDIA for their population. 

“Managed account programs work best when the employers [and] employees not only understand the cost involved, but really the potential benefits like higher contribution rates, better lifetime income scores [and] larger account balances,” said Spencer Goldstein, senior vice president at OneDigital Retirement + Wealth, during the webinar earlier this month, “Navigating Dynamic QDIAs.” 

By Morningstar’s definition, a dynamic QDIA is a combination of both target-date funds and managed accounts in which participants are transitioned from a TDF into a managed account around age 40 or 45. 

Empower Retirement was the first recordkeeper to introduce dynamic QDIAs, in 2016, and other recordkeepers, including Fidelity Investments, Schwab and Principal Financial Group have since followed with offerings. Edelman Financial Engines is the largest managed account provider by defined contribution assets, followed by Morningstar Inc. 

When working with plan sponsor clients on selecting a QDIA, Goldstein said he highlights several important areas to consider. First it is important for plan sponsors to look at the average age of their population, as managed accounts tend to benefit those with higher balances and a short-term horizon to retirement, he said. 

If an employer offers multiple retirement plans, such as an employee stock ownership plan or defined benefit plan along with a 401(k), Goldstein said he would likely recommend the sponsor implement a QDIA, which defaults participants into a managed account. 

He said it is also important to evaluate how participants are currently allocated in their investments. For example, if a plan has a host of participants in their twenties and thirties that are fully invested in cash or the stable value investment option, he argued that this could be a reason to use a managed account as the QDIA to get those participants engaged in investing.  

If a plan has a lot of activity, such as rollovers into the plan or loans being taken out, Goldstein said this could also be a reason to implement a dynamic QDIA.  

Craig Duglin, senior product manager at Capital Group, said his firm recently ran a survey of 52 plan sponsors and found that 75% of plan sponsors believed personalized asset allocations can improve retirement outcomes, and 63% said personalized asset allocations would provide more value than TDFs alone.  

Duglin added that 88% of participants want help creating a personalized investment plan, and 91% feel their employer should provide that plan. Capital Group also found that for participants in managed accounts, lifetime income scores are 18 points higher, while engagement is 38% higher than for those not in managed accounts. 

Tina Wilson, executive vice president and chief product officer at Empower, said participants that are in managed accounts are “nine times more likely to stick with their strategy when markets get dislocated.” 

“We spend a lot of time demystifying the notion that you have to choose between target-dates and managed accounts,” Wilson said. “Plan sponsors get nervous because they think we’re talking about a full replacement, but we’re not. When participants exit a managed account, 80% of time they’re self-directing; they’re not going to a target-date.” 

With the dynamic QDIA, Wilson said the time at which a participant transitions from a TDF to a managed account used to be around 55 years old but has since come down to age 40 to 45. 

“When people hit age 40 to 45, [their] investment outcomes are far more impactful on [their] ability to retire and create enough income than how much [they] save,” Wilson said. “It just becomes a math equation.” 

However, Goldstein said if an employer has a top-performing TDF in their plan as the QDIA, they would need a “pretty good reason” to unseat that manager and replace the QDIA. He explained it is important for a plan sponsor to evaluate the glidepath and cost of offering a TDF versus a managed account.  

He noted that if a plan uses a TDF along with a managed account, the participant is only being exposed to roughly the first half of the TDF glidepath. As a result, he said it is important that participants do not miss out on equities at the beginning of the glidepath if their assets will later transition into a managed account. 

With target-date offerings making up an estimated 50% of 401(k) plan assets as of April 2023, according to Fiducient Advisors, Duglin said, there’s clearly an acceptance level around TDFs that providers would be “remiss not to leverage” and further build on it to increase personalization.