Ups, Downs of Balanced Funds

When retirement plan sponsors were asked last year in the PLANSPONSOR Defined Contribution (DC) Survey what they thought was the best qualified default investment alternative (QDIA) option for their employee population, 56.7% said a target-date fund (TDF). Only 8.4% cited a balanced fund, and 8.8% a managed account.

Yet, while the percentage that chose balanced fund is consistent with the percentage using one—8.9%—overall use fell from a high, in 2015, of 11.3%.

Balanced funds have the simplest implementation of all QDIA options, as the plan sponsor can default all participants into the same fund. Moreover, they do not require the consideration of age or potential retirement date as do target-date funds, or additional data points as do managed accounts. From a due diligence perspective, finding a benchmark against which to measure a balanced fund may be also the easiest. However, the funds have yet to enter into wide use.

Perhaps interesting to note, though, is that these funds as the QDIA are far more common among micro and small plans than among large and mega plans. In fact, the highest take-up rate is among micro plans. In 2013, 19.9% of them used a balanced fund as their QDIA, although that fell to 14.2% last year. Small plans saw a high of 14.1% using a balanced fund in 2015; that declined to 10.8% last year.

By comparison, only 6.7% of midsize plans used a balanced fund as their QDIA in 2011. That increased to 11.9% in 2013 but then fell to 9.5% in 2015 and 7.6% in 2017.

In large and mega plans, balanced fund use in that capacity dropped off considerably. Just 2.1% of large plans used one in 2011; that rose to 6.6% in 2013, but fell to 6.3% in 2015 and 5.8% in 2017.

Balanced Fund Use as the QDIA

Source: 2017 PLANSPONSOR Defined Contribution Survey