investment-oriented | PLANADVISER July/August 2017

Default Thinking

How to advise sponsors about switching to managed accounts as the QDIA

By Judy Ward | July/August 2017
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Art by Lars Leetaru

“If target-date funds [TDFs] are the first iteration of the QDIA [qualified default investment alternative], I see managed accounts emerging as QDIA version 2.0,” says Andrew Harbour, head of the Atlanta office of Graystone Consulting at Morgan Stanley.

But Harbour’s practice currently has no clients using managed accounts as their plan’s default investment. “Everybody is asking about [them], but nobody wants to be the first to take the plunge,” he says. “Plan sponsors are wondering, ‘What is this managed account solution that everybody is talking about, and why would we use it as the QDIA?’”

Harbour explains it this way: Think of two 45-year-old employees who have been automatically enrolled into the same target-date fund. “In reality, those 45-year-olds may be in totally different phases of life,” he says. One may be a high earner who has saved steadily for retirement throughout his career and who wants to retire early. The other employee may make a much lower salary, have an uncertain retirement timeline, and may have only recently begun saving for retirement. “So, to make the argument that these two people should get the same target-date fund glide path and the same investments does not make a lot of sense,” he says. “Managed account solutions can take into account factors such as an individual participant’s risk tolerance, account balance, compensation and current deferral rate.”

Yet, just 7% of plans utilize managed accounts as the default investment, compared with 34.5% using active target-date funds and 21.6% using indexed target-date funds, according to the 2016 PLANSPONSOR Defined Contribution (DC) Survey. Harbour understands the current hesitation. “In most cases, it’s an expense ‘drag’—it’s an added cost. Clearly, it is easier and cheaper to use target-date funds,” he says. “But if sponsors’ goal is the best outcome for their employees, taking the underlying investments in a plan and doing a customized allocation for participants will interest them.”

Analyzing the Need
If a sponsor wants to re-evaluate what type of investment to use as its plan’s QDIA, that process starts with fully understanding the value proposition of managed accounts, balanced funds and target-date funds, says Shawn Sanderson, senior product manager at Manning & Napier Advisors LLC in Rochester, New York. “With managed accounts, their prime benefit is the ability to consider a number of factors, beyond a participant’s age, to do the asset allocation,” he says. A sponsor should analyze whether its participant base needs the more customized offering.

That means sponsors need a good understanding of their participant demographics. Asked about the most relevant data to consider, Sanderson points to those relating to new hires, as automatic enrollment generally focuses on that group. If most of a company’s new hires are young, early-career employees, “[they] come in with lower balances, and the conventional wisdom is that they all just need to focus on growth,” he says. So, target-date funds can work well. “But if you have a lot of dispersion in the new-hire demographics, managed accounts could be a viable solution,” he says. Older workers often have more varied finances, he notes.