Amid todays rapidly changing benefits landscape, employers are increasingly called to become more informed plan fiduciaries overseeing
At top of mind: how plan demographics and plan sponsor goals influence the QDIA selection process. Three main components hold particular importance to help employers make reasonable QDIA decisions and fulfill ERISA obligations.
1. Importance of selecting an appropriate type of QDIA in light of plan demographics and sponsor goals. Employers should move beyond simply ensuring that default investment options meet broad QDIA requirements. Thoroughly vetting all QDIA types to discern what investments best fit the plans goals and participants needs is a critical first step. Plan demographics extend beyond participant age, so fiduciaries should gain knowledge of past and expected participant behaviors regarding retirement ages, contribution patterns, actions at retirement, and expected withdrawal levels.
As examples: Higher plan turnover, or a majority of assets outside of the plan, may indicate that the glide path mechanism within a target-date fund doesnt necessarily align with participants needs and a single lifestyle or balanced investment option may be more appropriate.
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2. Selecting specific TDF approaches that best fit plan demographics and goals. TDFs are among the most popular QDIA type. Employers have more options, but need to understand whether plan goals align with a TDF products assumptions and philosophies. Employers must consider participants risk tolerance and capacity for risk which equates with the ability to absorb potentially meaningful losses in the market, without compromising long-term retirement goals. For example, participants who are maximizing contributions or who have additional sources of retirement income may have flexibility to pursue a more growth-oriented glide path than otherwise indicated.
Employers should consider developing a core framework that enables appropriate glide path evaluation, given plan demographics, with special attention toward participant behavior/needs near and after the target date. To and through glide paths should not be viewed merely as conservative and aggressive. Key data points for a more holistic evaluation approach include considering a glide paths broad asset class composition at key stages leading up to and after the target date, potential evolution in sub-asset class exposure as participants objectives change, and glide path steepness as the target date approaches.
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3. Given the DOLs guidance for plan sponsors to consider custom glide path alternatives, understanding the factors that may suggest a need for customization. While custom TDFs may be initially appealing, there are additional fiduciary considerations that generally do not come into play when dealing with pre-packaged solutions. These include investment-related considerations surrounding the management of the overall glide path as well as its underlying asset class components. Given the operational complexity and potential for increased fiduciary responsibility associated with custom TDFs, plan decision-makers should carefully consider whether their participants are different enough from the general population to warrant custom. Custom considerations include:
- Are the majority of plan participants provided with guaranteed retirement income benefits (i.e., defined benefit accruals)?
- Is the average retirement age of participants significantly different than the industry standard?
- Are a plans auto-enrollment/escalation and employer-sourced contribution rates significantly above industry standards?
Fiduciaries today face increasingly tough choices in the QDIA decision, amid a growing range of solutions. Despite these complexities, employers are obligated to ensure an objective, thorough and unbiased due diligence process. Only then, are participant needs truly placed first.
Shawn Sanderson is senior investment consultant with Manning & Napier, an investment management company.
