If you ask industry consultants what kind of effect qualified default investment alternatives (QDIAs) will have on the investment advisory industry and retiring boomers, they’ll use words like “revolutionize.” If you ask which of the three QDIAs will be most widely used–managed accounts, target date funds, or balanced funds–you’ll get a variety of answers.
Lou Harvey, president of Dalbar, says that for plan sponsors, QDIAs represent “the best fiduciary protection under ERISA at no cost.” For participants in 401(k) plans, QDIAs offer “the best investment mix,” and for advisors, while “their world becomes a bit more involved in that they have to monitor the QDIA,” the upside is the compensation they can earn from any of the three QDIA options.
But which QDIA is best? It depends on the type of plan being managed. For instance, with a “clustered” plan that includes participants of about the same age and risk tolerance, Harvey says a balanced fund would be the easiest to administer. For a “grossly segmented” plan, in which there are participants of different age groups working for a small firm, a target date fund fits best, he says. Managed accounts are most suitable for large plans with thousands of diverse and unclustered participants. This type of plan is the most difficult to administer, Harvey says, but the advisor can collect the most fees from it.
Tim McCabe, senior VP for PMFM/401k Toolbox in Watkins-ville, Georgia, a provider of advice and managed account services to plan participants, opines that the advent of managed accounts as a QDIA “challenges plan sponsors to understand the extraordinary differences between managed accounts and lifecycle or target date funds, the two options most likely to be used.”
While lifecycle funds are growing in popularity, McCabe notes, he advocates using managed accounts. One problem with target date funds, he says, is that they’re not all created equal. For instance, “if you a took a sampling of 2020 funds, you would find some with very high equity exposure, perhaps 70% or more, while others have equity exposure in substantially lesser amounts,” McCabe says. The target funds “may also seek differentiation by varying holdings, international versus domestic, or allocations of holdings.”