PSNC 2024: Essential QDIA Considerations

The qualified default investment alternative that a plan fiduciary chooses can shape participant outcomes for decades. As if that is not important enough, all the relatively new, compelling QDIA options for employees are making the evaluation and selection process even harder—and more important.

How should plan advisers and sponsors respond to this evolving QDIA market? By developing and then locking in a solid appraisal method, according to panelists speaking at the 2024 PLANSPONSOR National Conference in Chicago, Thursday.

“[With] the variety of funds out there today, it adds to the things that plan fiduciaries need to think about in terms of what QDIA or QDIAs do they actually want to offer,” said George Sepsakos, a principal in Groom Law Group, Chartered.

During the discussion, panelists cited options ranging from a variety of target-date funds—including passive and actively invested—managed accounts offering personalization, and different in-plan retirement income annuities.

Plan sponsors should feel confident that they have either created—or are working with an adviser who has created—a rigorous system for evaluating QDIA options for the specific needs of the plan, said Julie Varga, senior vice president, investment product specialist, with Morningstar Inc.

“It’s not about which QDIA is better than the other, but what is best for plan,” she said.

Managed Accounts

Varga, whose employer is one of the country’s largest providers of defined contribution managed accounts, championed their use for participants as a default due to the vehicles’ potential to provide personalized investing and financial advice. “TDFs create a target date that gets more conservative over time, but everyone [with the same target year] is in the same bucket,” she said. “When you look at managed accounts, they can really personalize the path to each individual participant.”

When participants engage with the offering, Varga noted, they can access advice to address their questions about retirement income, budgeting and how to manage their savings along with other assets. That, she said, can produce outcomes that justify the higher fees of a managed account over those of a TDF.

When asked about the value of a managed account if a participant does not engage with the account manager, Varga argued that the modern managed account still utilizes more data points than a traditional TDF, so it therefore is better tailored to an individual.

“In the early 2000s, [a managed account] was often a glorified target-date,” she said. “You didn’t get that much data from the recordkeepers. … That’s not the case anymore. We get from six to upward of [15] data points. … Taking that data into account is crucial in terms of how individuals should be allocated.”

For a plan fiduciary, considering and then selecting new managed account options can still be daunting. To help address that, Sepsakos’ Groom Law Group created a process and checklist for fiduciaries. But the ERISA [Employee Retirement Income Security Act] attorney made it clear that a plan fiduciary should know the fees participants would be paying if defaulted into a managed account—as the fiduciary would ultimately be responsible should a lawsuit come.

“When recordkeepers offer a managed account, it’s very hard to say a recordkeeper is a fiduciary [in court],” he said. Participants “sue the plan sponsor, not the recordkeeper. … Plan sponsors should drill in and peel the onion back on fees for QDIAs.”

TDFs-Plus

The importance of evaluating performance and fees extends beyond QDIA offerings such as managed accounts. Today, TDFs also come in many flavors, said John Doyle, senior retirement strategist at Capital Group, which owns American Funds.

“Not all target-dates are the same,” he said. Choosing the right one “takes time and evaluation.”

Doyle cited, for instance, actively managed TDFs that may produce better outcomes than passively managed ones. His firm’s American Funds specialize in those actively managed options.

Doyle explained three choices for plans considering a TDF. One was a co-manufactured solution, in which the recordkeeper and asset manager partner on the fund; the investment can come at reduced administrative fees for plan sponsors due to the benefits gained by the recordkeeper.

The second was a standard off-the-shelf option, from an asset manager, and can be simple to deliver, but should be evaluated for fees and performance, as well. Finally, there are more personalized TDFs in the market that factor in more participant data points than just age and risk tolerance—though, naturally, that may also mean higher fees.

“There are different flavors, with pros and cons,” Doyle said. “Not every version of target-date will be right for your participants.”

For 401(k) plans, he said, most TDFs are now being offered using collective investment trusts, a lower-cost option than mutual funds and available only to defined contribution plans. CITs were once more common among plans with large asset pools but have increasingly been moving downstream to smaller plans, he said.

CITs are not yet offered in 403(b) plans, so nonprofits are out of luck—though, Doyle said, legislation is moving through Congress to change that.

The panelists also discussed products that more recently have been attracting attention, and investors: TDFs that will put some qualified savings into an annuity—either early or later in a participant’s career—with the goal of providing a guaranteed paycheck in retirement.

Sepsakos observed that federal retirement legislation has made offering these annuity-backed options easier, by way of a safe harbor for plan fiduciaries. Due to the provision, if an insurance company has an issue making payments under the annuity, the insurer, not the plan sponsor, is on the hook for any losses.

However, Sepsakos was clear to point out that the “ultimate arbiter” of how these different QDIA offerings play out in the market will be the litigators. If a fiduciary defaults participants into any of these options, that fiduciary may still be called out if something goes wrong, Sepsakos said. “You have to consider the long-tail risk,” the ERISA expert advised.