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Retirement Planning > Retirement Investing

The Retirement Challenge

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I read with great interest the article “Which QDIA is Best?” (January 2008), and I agree with many of the concerns over selecting the right QDIA for plans with varying demographics. Most company plans have participants with different investment time horizons and risk tolerance, so the selection of the proper QDIA is often difficult. Target date funds may not properly manage the asset allocation to minimize risk and provide the proper retirement income. And, they may prove to be too conservative as retirees enjoy a longer life expectancy. I was also glad to see that collective investment trusts are being utilized and that a managed account approach may offer the best downside risk protection.

Our firm developed four collective investment trusts that use primarily separate account managers as the underlying allocations, ranging from a growth portfolio (100% equities) to a conservative portfolio (60% fixed income). Since the underlying assets are not mutual funds, there are no redemption fees and no transfer and withdrawal restrictions. And, we are using the same risk-based management system for the funds that we use for our wealth management clients. The DAI Asset Allocation Moderate Portfolio, which is 60% equities and 40% fixed income is being used in several plans as the QDIA. We feel that it combines the benefits of a balanced fund with the benefits of a managed account.

Selecting the right QDIA will continue to be a challenge as we observe the performance of the various options in both up and down markets and the effects on participant behavior. However, an investment advisor who takes his or her fiduciary responsibility seriously can add a great deal of value to a plan sponsor by helping them navigate through the new DOL rules.

Naomi Nagy, Chief Compliance Officer

Discipline Advisors, Inc.

Mankato, Minnesota

Sounding off on Soapbox

In the article “The Compensation Food Chain” (Soapbox, January 2008), the paragraph starting with “ That leaves us with performance-based compensation” states that “…mutual and hedge fund industries…” have been using performance-based compensation for years and this is partially incorrect. There is a prohibition on performance fees under the IA Act of 1940 for mutual funds with the specific exception of Fulcrum Fees for sophisticated investors. Fulcrum fees paid by sophisticated investors are about as plain vanilla to the general public retail investor as an income note of a structured finance product; in other words, they’re not in the same league and it would require re-written regulations to even create a performance-based compensated mutual fund. It’s important to make a clear distinction between hedge funds and mutual funds.

Tim Schaller



Tim Schaller does make a good point. Hedge funds use performance-based compensation significantly more than mutual funds. This is because mutual funds with performance-based fees must satisfy the “fulcrum” rule. That is, gains and losses must have a symmetric effect, meaning that the over- and under-performance relative to a benchmark results in the same amount of positive and negative incentive fees for a mutual fund manager. But beyond that, there are few rules about how they are applied. Although most mutual funds do not use performance-based fees, there still are some that do incorporate them which prompted me to include it in the article.

Dave Pike

Investment Analyst

Marquette Associates, Inc.

Chicago, Illinois


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