Advisers Crucial to QDIA Selection

The majority (86%) of plan sponsors surveyed indicate they are reliant on some form of intermediary to assist them with the general management of their DC plan investments, and 79% indicate they used or intend to use an intermediary to assist in the selection of their plans’ QDIAs, according to a study from Chatham Partners.

It makes sense that sponsors turn to an adviser or a consultant, as Chatham said many sponsors demonstrated a lack of understanding or knowledge about QDIA regulations. Despite this lack of knowledge, about two-thirds of the surveyed sponsors have elected a QDIA option for their plan.

The opportunity created by QDIAs is driving change for intermediaries by forcing them to devote resources to analyzing new products and developing services to meet the evolving needs of plan fiduciaries, according to the study. Specifically, intermediaries are focusing their efforts on improving how plan sponsors implement QDIA options and the evaluation and monitoring services they typically provide.

Nearly half of intermediaries interviewed (48%) report that they plan to change the services offered to their clients related to target-date funds, according to the study. Consultants (more heavily in the large-plan space), are more likely to look for opportunities to improve or customize target-date funds, while advisers (who generally work with smaller plans) intend to focus on fund evaluation and providing expertise, the study says.

Large-plan sponsors are more likely to want to customize their QDIA fund to meet plan specific criteria or objectives, according the study. Their rationales for customization include tailoring the risk profile to be reflective of employee risk tolerance and demographics, a desire to actively play a role in underlying manager selection, and minimizing fiduciary risk.

Recordkeepers play an important role in QDIA selection, as plan sponsors indicate that their recordkeeper either offered a proprietary option managed by an affiliate of the recordkeeper or offered a range of options including one managed by an affiliate 89% of the time. On average, the survey found, the recordkeeper is making a specific QDIA recommendation almost half of the time.

The perceived magnitude of the QDIA opportunity is enticing investment consultants into the investment management arena, according to Chatham. Many firms state that they are at least considering developing QDIA manufacturing capabilities. Most consider creating target-date or risk-based/balanced funds as a logical extension of the manager and investment research they presently provide to plan sponsors.

While many investment managers point to the potential conflict of interest in consultants attempting to make the transition to money management, plan sponsors who say they would at least give consideration to the idea seem less concerned.

QDIA Preference

Larger plans were more likely than smaller plans to have implemented a QDIA option, with three-fourths of mega plan sponsors (greater than $1 billion in assets) selecting a QDIA option. Half of smaller plan sponsors (less than $10 million in assets) said they had chosen a QDIA alternative.

Chatham said that among plan sponsors that have selected a QDIA, target-date funds are the most frequently cited option followed by risk-based/balanced funds, and managed accounts. However, Chatham said plan sponsors who have not selected a long-term QDIA do not demonstrate a strong preference for one alternative. Almost 40% of those who have not chosen a QDIA express uncertainty as to which option they will ultimately choose.

Plan sponsors who have chosen a QDIA commonly cited pricing/fees, performance-related attributes, fund diversification, and risk/return characteristics as some of the more important factors they took into consideration when selecting a fund.

Overall 19% of plan sponsors indicate they use an index manager to manage their QDIA. Almost two-thirds of them sponsored plans with at least $250 million in assets. Sponsors that chose index managers said they primarily did so because the products are low cost, avoid security selection and market risk, and are easy to explain to plan participants.

The survey was completed by 499 plan sponsors affiliated with corporate defined contribution plans ranging in size from $1 million in assets to more than $1 billion in assets and 60 investment consultants and financial advisers. The results are in the report And They’re Off!— The Race to Gather QDIA Assets— An Assessment of Selection and Evaluation Criteria of QDIA Options by Plan Sponsors and Their Intermediaries.