Forget the either/or. When it comes to investing your hard-earned money for retirement, wouldn’t you want as many options as possible?
While that may sound like an easy yes, we’ve found that in the case of qualified default investment alternatives (QDIAs)—solutions designed to help provide defined contribution (DC) retirement plan participants with better retirement outcomes in the long term—plan sponsors tend to look at selection as an either/or decision. Why?
Generally, sponsors view it as a distinct and singular choice between the three options identified in the QDIA regulations—balanced funds, target date funds (TDFs) and professionally managed accounts. We believe a better approach is to consider holistic solutions that seek to further enhance outcomes based on what’s best for a particular situation. In other words, one size needn’t fit all.
What does a hybrid QDIA look like?
At Russell Investments, we see a natural evolution toward more thoughtful and potentially more effective approaches to QDIA selection. For example, a hybrid QDIA may include an asset allocation fund, like a target date fund or balanced fund(s), transitioning into a professionally managed portfolio when participants get closer to retirement and their financial situations become increasingly complex. This approach combines the simplicity of target date funds with the adaptability of professionally managed accounts, including additional information on participant-specific asset allocation advice when it’s needed most—in the late-career phase and into retirement.
As the infographic below shows, a hybrid QDIA can help plan sponsors create a more comprehensive default investment program designed to improve participants’ retirement outcomes across all plan demographics.
A spectrum of options—not just this or that
Today, given the critical role QDIA will play for an ever-increasing number of retirement savers, we see merit in viewing a QDIA decision more broadly. Rather than asking which QDIA option is right for the plan, we think it’s better to ask which QDIA option is right for which participants in the plan.
To be clear, we believe all three QDIA options share more similarities than differences. Together, they consist of a spectrum of multi-asset outcome-oriented solutions managed by a professional. The differences lie in the level of customization of investment solutions for participants when implemented as a default:
- A single balanced fund provides no differentiation.
- A TDF differentiates based on age.
- A professionally managed portfolio differentiates based on multiple factors beyond age.
We believe these differentiators are important, which is why we use a consistent asset allocation methodology across all of our default investment solutions.
It’s not all about age: Casting a wider net with QDIA
Many plan sponsors are recognizing that their qualified default investment alternatives need to accommodate workers of all ages and stages, from early-career savers to pre-retirees, and, increasingly, post-retirees as well. To date, the most popular QDIA solution has been target date funds. Why? They’re easy for sponsors to implement, and help to combat participant inertia.
As participants age and accumulate higher account balances, we’ve found they’re more likely to need a more customized investment allocation based on more than just age. Professionally managed accounts have the potential to improve upon target date fund-only outcomes because they can utilize data available from the plan’s recordkeeper (such as salary, savings rate and account balance) to build a more personalized and precise glide path for each participant. This can then be adjusted as needed based on progress toward the participant’s estimated retirement income goal—without any hands-on action required by participants.
While a single QDIA solution for an entire plan may be right for some, we believe the industry is better served by adopting solutions that don’t consider just single categories of QDIAs, but provide more tailored solutions for varying participant needs.
It’s vital that fiduciaries understand the underpinnings of any QDIA solution, including a hybrid solution. We also believe any default solution selected must remain consistent with the sponsor’s investment beliefs, provide widely diversified portfolios, rely on open architecture and—above all else—be laser-focused on solving for participants’ retirement income goals.
The bottom line
One size doesn’t fit all. As more and more workers rely on DC plans to prepare for retirement, plan sponsors should recognize the unique circumstances that set one employee apart from the next. Each participant has their own desired goals and outcomes—what works best for one may not work at all for another. This is why we believe the best way to fully harness the potential of QDIAs is to look beyond a product-centric approach. By considering solutions that can bring about the best outcomes for participants on an individualized basis, sponsors are helping to broaden the net of financial security.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
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