The evolution of qualified default investment alternative
(QDIA) structures, and the expanding flexibility for retirement income
solutions are two key trends in the defined contribution (DC) space for 2017,
according to the latest findings by global research and consulting firm Cerulli
The firm found that slightly less than half of DC plan
sponsors currently have a retirement income option, with target-date funds
(TDF) and managed accounts being the primary offerings. The figure is slightly
higher for larger plans with greater than $500 million in assets. Overall, less
than one-fifth of plan sponsors cited a guaranteed annuity product.
But Cerulli observes that product development in the DC
space may widen the door for retirement income products.
The firm points to a “hybrid” QDIA recently rolled out by Great-West
Investments, an affiliate of Empower Retirement.
The Dynamic Retirement Manager
automatically switches a participant’s assets from a TDF to a managed account
at an age selected by the plan sponsor. The new managed account would include
both retirement income allocations and investment options not already on the
core menu. Cerulli believes managed accounts are generally better for older
investors as they typically have larger balances, justifying a need for a
greater degree of personalized advice. Moreover, they also tend to have a
greater grasp of retirement needs the closer they are to it.
Although it is designed for plans of all sizes, Great-West
Investments reports that it already has two large plan sponsors on board for
the hybrid product.
Dynamic Retirement Manager encompasses annuities. If a plan makes a retirement income product
available, the managed account will recommend to it
The firm finds that nearly half (47%) of all mega plan
sponsors prefer to have terminated or separated employees leave their assets in
the plan and draw income from their 401(k). Among all plan sizes, the
preference for this is at 37%.
Based on Cerulli’s research, 90% of 401(k) plans currently
are not designed in a way that would allow investors to make systematic or ad
hoc withdrawals – a benefit that older participants ages 60 and older value the
most in a retirement income plan. Studies also show older generations are eager for
retirement income, but may require better understanding of these
Cerulli’s report U.S. Defined Contribution Trends for 2017
notes, “plan sponsors’ belief that participants belong in plan and a potential
lack of other options may conspire to force an evolution of 401(k) plans
overall. While it is not a quick fix, plan sponsors and consultants can work
together to change and amend plan documents such that 401(k) plans more broadly
offer the retirement income flexibility that participants need.”
The firm also noted two recent developments by TIAA. One of
its products periodically drives assets to a fixed annuity, with the intent of
creating a specific level of guaranteed income. TIAA reports that about 10
non-profit organizations use this option. Another product starts allocating to
Treasury Inflation Protected Securities (TIPS) once a participant reaches a
certain income replacement target such as 80%. TIAA received a letter from the
Department of Labor (DOL) indicating both of these products could be considered
prudent QDIAs. However, Cerulli notes the DOL drew the line at granting safe
harbor for selection of these products in a qualified plan.
"Asset managers should closely watch product
development in QDIA trends in the DC market," explains Bing Waldert,
managing director at Cerulli. "These products represent an opportunity for
asset managers with capabilities in the multi-asset-class space.
Multi-asset-class solutions are one of the key ways in which asset managers are
redistributing their intellectual capital to compete against the continuing
rise of passive products. This may present an opportunity for insurers and
asset managers to work together to introduce guarantees into next-generation
The firm concludes, “Cerulli believes the retirement income
space in DC plans is ripe for product development, particularly for insurance
companies that continue to experience pressure on their legacy
accumulation-oriented annuity business.”
The U.S. Defined Contribution Trends for 2017: QDIA Product
Development and the Evolution of Retirement Income Solutions report, part of The
Cerulli Edge―U.S. Retirement Edition, 1Q 2017 Issue.