One Size Does Not Fit All

Advisers have a responsibility to help plan sponsors properly evaluate their QDIA selections Selecting an investment to serve as a plan’s qualified default investment alternative (QDIA) is a fiduciary action for which plan sponsors frequently look to their advisers for help. To discuss the role retirement plan advisers play in this selection, PLANADVISER spoke with Adam Sokolic, senior vice president of retirement and client marketing at American Century Investments. He discussed the need for a process and gave insight as to how advisers and plan sponsors can make a prudent selection.

PLANADVISER: Why should an adviser have a process for selecting a qualified default investment alternative [QDIA]?

Adam Sokolic: It started with an adviser evolving into a fiduciary at the plan level and taking on the responsibilities that come with that role. This is, of course, because of the more litigious environment plan sponsors find themselves in today. I just read that 90 lawsuits have been filed against different 401(k) plan sponsors by former participants.

As you and your readers know, it’s not necessarily about the end choice you made but the process you employed to get there. When we talked to our adviser clients, many had no standardized means to help sponsors make those choices.

For plan sponsors, many had only one choice when they first started their plan or when they moved to a new recordkeeper. So, they never investigated or learned how to investigate other options. What was missing was the hand of the adviser guiding the plan sponsor through this process. Sponsors missed having someone periodically analyzing their needs in terms of its specific employee population, looking at all the QDIA choices available, including, potentially, at other recordkeepers, then making an educated choice and documenting that decision.

Having a process helps ensure you are prepared if and when litigation comes knocking. In light of all the guidance the Department of Labor [DOL] has given concerning the PPA [Pension Protection Act of 2006], QDIAs and target-date funds [TDFs], a plan sponsor being able to show it had a documented process for how it reached a decision will be crucial.

PA: Do you know a success story where having a process like this especially protected a plan sponsor, an adviser or both?

Sokolic: We’ve definitely heard positive feedback from clients that have used this process with their plan sponsors, and from the law firm we partnered with to create it. The process offers value to the plan sponsor in that they can be prepared to provide documentation if requested by the regulators. It may help bolster the protection that a QDIA offers.

PA: What’s the most important element for a plan sponsor in selecting and monitoring a QDIA?

Sokolic: It’ll vary by plan sponsor. The sponsor should look at the demographics of its participant base and whether terminated participants typically leave their money in the plan or take it with them. That’s important when selecting a QDIA. You want to get the employees to the finish line—whatever that finish line looks like for that group of employees. So, what QDIA will help the vast majority most?

PA: What have you developed to help advisers support their plan sponsors as they create a process to select and monitor their QDIAs?

Sokolic: We developed a QDIA Selection Process Kit which includes an Adviser Guide. The content discusses history, the PPA, where the market is, the evolution of target-date funds and their impact. We equip advisers with the questions to ask their plan sponsors, to lead them through the process, e.g., “Has your participant population changed over time? When you set up your plan and selected your QDIA, did you only have the choice of a balanced fund? Did you ever consider a managed account or a TDF?”

The adviser uses the guide with their client to document and offer important considerations throughout the process. For example, the adviser can say, “Here’s what your current recordkeeper offers; here’s what’s in the marketplace and best practices used there. If your recordkeeper doesn’t offer everything we need, let’s consider another option. Let’s have that conversation, follow that road and most importantly, document that process.”

Then, once you work through the implementation, you need to monitor the QDIA. Our Plan Sponsor Guide lays out step-by-step best practices for which the sponsor and adviser can say, “Here’s why we selected this choice. That’s the criteria by which we’ll measure and monitor, ongoing.”



PA: Then what do you see as the adviser’s involvement vs. that of the plan sponsor?

Sokolic: A 3(21) adviser, for one example, offers expertise and a process; he or she walks the sponsor through that process and educates the committee on industry best practices: “Here’s what we see and what you should be considering,” and offers suggestions. Of course, the plan sponsor has the ultimate responsibility, but often the adviser needs to make sure all we just discussed occurs.

PA: How did you develop the program?

Sokolic: We partnered with Jason Roberts and the Retirement Law Group. We said, “Here’s what we’re trying to solve and develop. Help us create the most robust process that can offer the most protection possible, and tell us what that will look like.” He provided much of the content, and we packaged it, both for advisers and plan sponsors, in bite-size pieces and easy-to-understand language.

PA: How does the QDIA Selection Process Kit address the various types of potential QDIAs?

Sokolic: For a process to be effective and withstand potential litigation, it must be unbiased, and it must allow for all three options. At some plans, a managed account could be the right solution, at others a risk-based fund, at others a target-date fund. Additionally, not all target-date funds are created equal, so we also need to determine what a target-date fund should look like for the specific participant population.

One important reason we wanted to partner with Jason was to get an independent, expert view of the QDIA process and to increase our value proposition with the consultant and adviser community. Our primary goal is to help participants achieve a secure retirement.

PA: I appreciate your point. We’ve seen a lot of interest in managed accounts recently. Do you believe this program will help plan sponsors evaluate their demographics and how their plan and participant groups might be better suited for one option vs. another?

Sokolic: That’s the intent of the program. When an adviser takes over a plan, it may never have had an adviser. Maybe it was a startup, and now it’s at $5 million and ready for one. There’s no guarantee it had a process implemented upfront, and if it didn’t, even if you’re in a target-date fund, it may have a proprietary offering that’s bundled with the recordkeeping services and the fees aren’t considered separately. Is the selection what’s best for the participants? The program gives the adviser, and the plan sponsor, the consideration and process to arrive at the answer.

Again, this is about building a relationship with the adviser, helping him or her manage their practice more efficiently, more effectively and to potentially minimize risk.

PA: Anything else we should discuss?

Sokolic: From our proprietary research, we found there’s a gap in the industry—that many plan sponsors and advisers chose their QDIA in 2007, but the choices were limited. Investment menus were different. There were far more proprietary bundled providers where, if you were with one, you got its target-date fund almost by default.

So, if an adviser is in the retirement plan business, he or she should want to take a step back and say, “I need to consider this and encourage my plan sponsors to look at this, because the decision we made 10-plus years ago may not be the best for today.”

To sum up, it’s a five-step process: assess, research and evaluate, make the selection, implement, then monitor. And the key is that it’s repeatable and ongoing—something we envision advisers and plan sponsors doing every few years. Besides asking, “Is this QDIA beating the benchmarks? Is there manager tenure there, is there turnover?” you’ll need to know, “Is it also right for my participant base?” Your participant base will change over time, and plan sponsors need to keep considering that.

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This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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