QDIA Essentials

Not all retirement plans, or retirement plan sponsors, have the same goals, and a sponsor’s goal for the plan is an important consideration when selecting a qualified default investment alternative (QDIA)—whether a managed account, balanced fund, or target-date option—for a plan. When helping a client select a QDIA, an adviser first must understand the plan’s objective, said Christina Stauffer, Vice President at PIMCO. For instance, does the plan sponsor want to maximize the total wealth of the plan, or maximize the total number of participants?

It might come as no surprise that, when a room full of advisers at the PLANADVISER National Conference was asked to demonstrate by a show of hands what QDIA they were using in their plans, few were using anything other than target-date funds. However, the assessment of which target-date fund is appropriate for a plan is an important fiduciary decision by the plan sponsor and adviser, panelists said.

Just as no two investors are the same, so, too, are no two plans the same, said Chris Herman, Vice President and Director of Retirement Solutions at Old Mutual. Some plan sponsors might be more conservative in nature, for instance, and it is a critical role for an adviser to help the sponsor in diligent selection of a QDIA that is right for the plan, he said. Doug Prince, Managing Director of Stifel Nicolaus, explained that he will be visiting his sponsor clients every year with a check list to help them reaffirm their QDIA selection.

For advisers creating a QDIA from scratch, instead of using an off-the-shelf product, Stephanie Napier, Vice President and Senior Trust Counsel at M&I Institutional Trust Services, told advisers that it is a good idea to make sure a plan’s service providers keep up communication with all parties involved. “It’s critical that your service providers can support whatever you are doing,” she says. Herman also noted it is good to ask, “Who’s managing the [investment] managers?”

Target-Date QDIAs

In terms of creating a customized target-date solution, Stauffer said many advisers are offering a multimanager approach. Advisers a custom solution should decide who are the best-in-breed managers, as well as when to select active or passive funds. In terms of diversification, Stauffer suggested that, once an adviser establishes the glide path for a target-date solution and the objectives for the fund, he has flexibility with some of the asset classes. For instance, she suggested, some assets that an adviser would not usually put in a plan’s fund menu might serve a nice purpose within the QDIA. “When you have control of the glide path … you can bring in assets perhaps you wouldn’t want in the plan lineup,” Stauffer said.

In the smaller market, advisers might be effectively restrained to a choice between “off-the-shelf’ target-date offerings. Advisers are critical to helping sponsors with the decision of which of these pre-packaged offerings to put into a plan, panelists said. “Especially in the small-plan market you’re going to be led to the packaged product,” Herman said. He suggested several ways for advisers to help sponsors choose the right target-date fund for use as a QDIA.

First and foremost, Herman reiterated, advisers should know the plan—understand the investor, the risk tolerance of the plan, and what participants have done in volatile markets in the past. Then, the adviser needs to benchmark the target-date options and the degree of diversification, followed by benchmarking the underlying funds. “It’s our view that too many sponsors have not gone through that diligence process today,” Herman said. To benchmark the asset allocation, Herman suggested getting a view as to how these funds performed by back-testing the funds—analyze how the asset class levels might have performed in current markets. “It’s not magic, but it certainly gives you clarity as to how the funds might perform in the next bear market.”

How to prevent getting sued 10 years down the road? Jason C. Roberts, an attorney at Edgerton & Weaver, LLP, told the audience it is all about documentation. Advisers and their clients need to make sure they have documents evidencing their due diligence during the selection process—“The more there is in writing, the merrier,” he said. It is also important to define the adviser’s role, he said, and if the adviser was involved in the selection process of a QDIA, he should make sure to have an assessment of plan and participant demographics in the documentation, because the final regulations require that as a consideration in selecting a fund. He recommended that advisers deliver the necessary documents to the plan sponsor—thereby also adding value to the adviser-sponsor relationship.

Illustration by Gérard DuBois