A close look at selecting and evaluating qualified default investment alternatives (QDIA) forces some questions about the value an adviser can add to the process. For instance, though advisers may be good at helping to craft custom funds, this might not always be appropriate.
Simply put, there are so many different low-cost, off-the-shelf solutions that most plan sponsors can typically find one that meets their needs, says Kevin Roloff, director of research at Francis Investment Counsel in Pewaukee, Wisconsin.
“When it comes to custom target-date funds, the juice very often isn’t worth the squeeze,” he adds. “The top off-the-shelf products from the big guys out there are well-resourced and well-run. It’s a tall task for any adviser who wants to match that quality.”
Ryan Gardner, managing partner and head of defined contribution (DC) at Fiducient Advisors in Windsor, Connecticut, echoes that idea.
“For the vast majority of plans, assuming participant savings levels are appropriate, [off-the-shelf] is probably a fine choice,” Gardner says. “The value for customization comes when you have a unique plan demographic, such as if participants are retiring earlier or if they have some other benefits outside the plan that will provide more income in retirement.”
Plans might also consider a custom approach if they have a particularly risk-tolerant demographic, or if plan sponsors have some other specific visions for asset class exposure, Gardner says.
Plans that are well-served by off-the-shelf solutions are often better off directing their resources toward finding an adviser who can focus on participant advice and plan design—two areas that have a significant impact on outcomes.
“We are huge proponents of personalized advice,” Roloff says. “I love target-date funds, but the only input they use is age. Personalized advice allows for other inputs such as goals, willingness to take on risk and assets outside the plan.”
Steve McKay, head of defined contribution investment only (DCIO) at Putnam Investments, says that anything plan advisers can do to promote plan engagement can make a plan more successful.
“Spending time to get the right plan design and the right education program and engagement program on an ongoing basis is really important long-term,” he adds. “Advisers haven’t always focused on that, but we’ve come a long way.”
Even if they’re not building custom funds, advisers can add value by helping plan sponsors select between the many TDFs available in market. Advisers can provide key guidance in analyzing, making and documenting these decisions. For example, while a low-cost, passive fund can be a safe route from a fiduciary perspective, they’re not the best choice for every plan.
“There are a number of active target-date providers that are high quality and have a long history,” Roloff says. “We readily endorse those when a plan sponsor has the appetite for the increased onus of monitoring an active manager.”
Plus, with the race to the bottom in fees, the fee gap between active and passive funds has closed significantly, making advisers’ input all the more important.
“Active management, especially among the target-date providers that have a lot of assets, is actually pretty darn cheap,” Roloff says. “They’re very competitive in terms of free structures and sheer size. The have continuously passed along savings to participants in the form of fee reductions.”