September 29, 2022 | 7 Minute Read
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.
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).
Source: PSCA’s 64th Annual Survey, published 2022.
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.
Source: Morningstar, 2022 Target-Date Strategy Landscape. Data as of 12/31/2021.
Source: Cerulli, U.S. Retirement Edition, 1Q 2022, 1Q 2021, 1Q 2019 and 1Q 2017.
Source: DCIIA Custom TDF Survey, published May 2020.
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).
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.
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