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    GSAM Insights

    DEFAULT INVESTING: THE QDIA LANDSCAPE

    September 29, 2022  |  7 Minute Read
     

    Introduction

    There has been tremendous focus on and increased utilization of default investing since the Pension Protection Act of 2006 (PPA). While several types of investments are eligible under the qualified default investment alternative (QDIA) rules, TDFs have captured the bulk of the assets.  We believe the market share among the QDIA types may be poised for greater change, as outlined in the following pages.

     

    Background

    The PPA provides a safe harbor for plan fiduciaries investing participant assets in certain types of investments in the absence of participant investment direction. The DOL’s final regulation provides conditions that must be satisfied in order to obtain fiduciary relief, and indicates that fiduciaries are not relieved of the liability for the prudent selection and monitoring of qualified default investment alternatives (QDIAs).

     

    Types of QDIAS

    1. Target Date Fund or Lifecycle Fund: A product with a mix of investments that takes into account the individual’s age, target retirement date or life expectancy
    2. Managed Account: An investment service that allocates assets among plan investment options to provide an asset mix that takes into account the individual’s age, target retirement date or life expectancy
    3. Balanced Fund: A product with a mix of investments consistent with a target level of risk appropriate for participants of the plan as a whole

     

     

    Increasing Level of Customization among QDIAs

     

    Source: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/final-rule-qdia-in-participant-directed-account-plans.pdf

     

    Target Date Funds are the Dominant QDIA

     

    Source: PSCA’s 64th Annual Survey, published 2022.

     

    Evolution of QDIA options

    While there are multiple acceptable QDIA options, target date funds have been the prevalent choice to date. The target date market has grown rapidly over the last decade to an estimated $3.27 trillion; industry assets have increased by nearly 10x. Assets continued to grow in 2020 despite a drop in participant contributions. By comparison, the DC managed account landscape is roughly 15% of the size of the total target date market.

     

     

    Explosive Growth of Target Date Assets

     

    Source: Morningstar, 2022 Target-Date Strategy Landscape. Data as of 12/31/2021.

     

    Meaningful Growth of Managed Accounts

     

    Source: Cerulli, U.S. Retirement Edition, 1Q 2022, 1Q 2021, 1Q 2019 and 1Q 2017.

     

    Smaller Slice of the Target Date Market

     

    Source: DCIIA Custom TDF Survey, published May 2020.

     

     

    • In 2013, the DOL issued Target Date Funds – Tips for ERISA Plan Fiduciaries, which provided general guidance in selecting and monitoring TDFs including inquiring about whether a custom target date fund would be a better fit for the plan.
    • However, the custom TDF marketplace has not seen the same level of growth over time as the broader TDF market.

     

    Certain Considerations

     

    • Target Date Funds: One size may not necessarily fit all, especially as participants age and have diverging needs. There is also the potential for participants to use target date funds in ways that may not be intended, such as participants holding more than one vintage or holding TDFs in addition to other investment options.
    • Managed Accounts: Managed accounts are currently more commonly offered in a plan as an opt-in service. The extent of participant engagement can be important in that greater customization is available where the participant is more fully engaged.
    • QDIAs may typically be considered an accumulation vehicle inside an accumulation-focused defined contribution plan. As the industry trends toward (a) customization and (b) an emphasis on decumulation (retirement income), will we see a shifting mindset for the QDIA?

     

     

    (R)evolution of QDIA Options

     

    What comes next? (R)evolution of QDIA Options?

     

    Will target date funds continue their dominance as QDIA options in DC plans? Will industry trends emerging around the desire for (1) retirement income and (2) increased personalization/customization lead to an evolution of target date offerings or even a revolution of QDIAs altogether?

     

    A number of target date managers are evolving their offerings to focus on the decumulation aspect through the use of annuities and managed payout structures. Managed account services are focused on the desire for increased personalization and, in some cases, are also addressing retirement income. The concept of a hybrid QDIA (sometimes referred to as a dynamic QDIA) has emerged.

     

    What is a Hybrid QDIA?

     

    A hybrid QDIA is an approach in which a participant’s default investment starts as one type of investment (such as a target date fund) and, upon reaching a certain threshold (e.g., age), automatically transitions to a different type of investment (such as a more retirement-focused solution like a managed account).

     

     

    What is a Hybrid QDIA?

     

    Source: Goldman Sachs Asset Management. For illustrative purposes only.

     

    According to a recent DCIIA research paper that interviewed plan sponsors who adopted a hybrid (dynamic) QDIA, a primary reason they did so was to provide participants the age-appropriate service and advice they needed to optimize their retirement outcomes. The paper noted that participants’ investment sophistication, or lack thereof, helped drive the plan sponsors’ decision to adopt the dynamic QDIA.

     

     

    Traditional vs. Hybrid Approach

     

     

    Additional Considerations

     

    • An increase in competitiveness across providers is driving down costs and favoring scale.
    • The role of technology will be critical in driving increased personalization and digitalization.
    • Recordkeepers’ involvement/support for services and solutions will continue to be important.
    • As plan sponsors consider their own plan’s circumstances and demographics, customization may be of growing interest.

     

     
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    THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON’S OR PLAN’S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION.

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    This information is not a formal recommendation. Views and opinions are current as of the date of this presentation and may be subject to change.

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    Date of first use: September 29, 2022. 285345-OTU-1647206

     

     

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