Todd Lacey, managing director of (k)larity Group, once had a participant ask why the plan offered so many Target funds and none from Wal-Mart. While this anecdote evoked audience chuckles, it also illustrates the more serious problems facing advisers and sponsors when educating participants, even with qualified default investment alternatives (QDIAs). Although the panelists said using QDIAs are critical to turning inertia into productivity, even those do-it-for-me strategies can be confusing or counterproductive.
That is why the selection of a proper QDIA—whether target-date fund, balanced fund, or managed account—is an important process. Chris Herman, vice president and director of retirement solutions at Old Mutual, pointed out that the selection is also important for legal reasons. While QDIA rules allow a safe harbor for auto-enrollment, they do not provide a safe harbor in the selection process. Just accepting the target-date option from a recordkeeper without going through a diligent process is a risk, Herman said. He says when evaluating a target-date fund the risk and management need to be evaluated.
Missing the Target
While QDIAs have the potential to alleviate the DC problem of putting plans into the hands of participants, the panelists still see challenges. Only a small percentage of participants actually use their target-date funds how they are intended to be used, said Jim Danaher, senior product manager, defined contribution solutions at Northern Trust.
In reality, giving investment advice to every employee would be the best option, if a company were actually able to shoulder this expense, Lacey said. Regardless of whether this is possible, he stresses communicating to the participants, who will inevitably misuse their QDIAs without direction. “Regardless of which of these options you offer, someone’s got to be talking to these participants,’ he said.