Plan Sponsors Quick to Make QDIA Selection

In a press release, Chatham said that among plan sponsors that have selected a QDIA, target-date funds are the most frequently cited option followed by risk-based/balanced funds, and managed accounts.

However, Chatham said plan sponsors who have not selected a long-term QDIA do not demonstrate a strong preference for one alternative compared to another. Almost 40% of those who have not chosen a QDIA express uncertainty as to which option they will ultimately choose.

Plan sponsors who have chosen a QDIA commonly cited pricing/fees, performance-related attributes, fund diversification, and risk/return characteristics as some of the more important factors they took into consideration when selecting a fund.

Overall 19% of plan sponsors indicate they use an index manager to manage their QDIA. Almost two-thirds of them sponsored plans with at least $250 million in assets. Sponsors that chose index managers say they primarily did so because the products are low cost, avoid security selection and market risk, and are easy to explain to plan participants.

Large plan sponsors are more likely to want to customize their QDIA fund to meet plan specific criteria or objectives, according to the press release. Their rationales for customization include tailoring the risk profile to be reflective of employee risk tolerance and demographics, a desire to actively play a role in underlying manager selection, and minimizing fiduciary risk.

The majority (86%) of plan sponsors surveyed indicate they are reliant on some form of intermediary to assist them with the general management of their DC plan investments, and 79% indicate they used or intend to use an intermediary to assist in the selection of their plans' QDIAs.

The opportunity created by QDIAs is driving change for intermediaries by forcing them to devote resources to analyzing new products and developing services to meet the evolving needs of plan fiduciaries, Chatham said. Specifically, intermediaries are focusing their efforts on improving how plan sponsors implement QDIA options and the evaluation and monitoring services they typically provide.

Recordkeepers play an important role in QDIA selection, as plan sponsors indicate that their recordkeeper either offered a proprietary option managed by an affiliate of the recordkeeper or offered a range of options including one managed by an affiliate 89% of the time. On average, the survey found, the recordkeeper is making a specific QDIA recommendation almost half of the time.

The perceived magnitude of the QDIA opportunity is enticing investment consultants into the investment management arena, according to Chatham. Many firms state that they are at least considering developing QDIA manufacturing capabilities. Most consider creating target-date or risk-based/balanced funds as a logical extension of the manager and investment research they presently provide to plan sponsors.

While many investment managers point to the potential conflict of interest in consultants attempting to make the transition to money management, plan sponsors who say they would at least give consideration to the idea seem less concerned.

Chatham said investment managers seeking to gain a foothold in the QDIA management market should note that the majority of respondents who have selected a QDIA are very satisfied with their QDIA manager, and the largest plans (>$1 billion), in addition to being the most likely to have selected a QDIA option, seem to be the most content with their QDIA manager.

Of the respondents who expressed dissatisfaction with their QDIA manager, only one-third are at least considering changing their QDIA manager.

Results of the survey, completed by 499 plan sponsors affiliated with corporate defined contribution plans ranging in size from $1 million in assets to more than $1 billion in assets and 60 investment consultants and financial advisers, are in Chatham Partners' report titled "And They're Off! - The Race to Gather QDIA Assets - An Assessment of Selection and Evaluation Criteria of QDIA Options by Plan Sponsors and Their Intermediaries."

For more information about the research study, contact Joshua Dietch at jdietch@chathampartners.net or call (781)314-0610.