Interview | Published in July 2012

False Sense of Security?

Recent survey shows plans may be unaware of their risks relating to QDIAs

By PLANSPONSOR staff | July 2012
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For five years, Janus has partnered with PLANSPONSOR in a special section of PLANSPONSOR’s annual DC Survey devoted to plan sponsors’ assessment of qualified default investment alternative (QDIA) and target-date fund (TDF) issues. The survey findings were discussed during a recent webcast with panelists Russ Shipman, senior vice president and managing director of Janus Retirement Strategy Group; Toni Brown, partner and senior investment consultant in Mercer’s San Francisco office; and Karen Bartholow, vice president of Global Benefits Analysis for News Corp.

PS: When we look at the 2011 survey results, are plan sponsors’ perspectives about QDIAs consistent with what you’re seeing in the marketplace?  

Toni Brown: The survey supports what we’ve been hearing from clients. Although TDFs continue to be added to plans on a regular basis, I was surprised to see that smaller plans had not added them to the extent larger plans had. We expect to see that market segment grow significantly, going forward.

Karen Bartholow: News Corp.’s peers in the large-plan space have increased the use of TDFs, and many surveys have shown an increase in [their] use over the past five to seven years.

Other surveys have also shown a corresponding decrease in the use of target-risk or balanced funds, and I think part of the reason might be that, once you’ve added a range of TDFs, it seems redundant to have balanced funds. At News Corp., we’ve reduced the number of balanced fund offerings. And in terms of a QDIA, one of the appeals of using a TDF is that it addresses the changes in risk tolerance that individuals will likely experience as they get closer to retirement.

Russ Shipman: The most recent survey data and findings are consistent with the anecdotal stories and ongoing discussions we’re having in the marketplace, but there is also a mindset shift to “Let’s take a hard look at our current TDF and really understand what’s driving performance,” and, importantly, “How will this fund respond in different market environments?” We also view as fairly significant and notable the survey result showing one of four plans is still uncertain about picking a QDIA, especially given that we’re more than a few years past the Pension Protection Act [PPA] of 2006.

PS: Why do you think the survey results show that plan sponsors view balanced funds as better for low fees and transparencies but TDFs as better for performance? 

Brown: I think plan sponsors are viewing balanced funds as one fund with a 60/40 allocation. Balanced funds are simpler by design—they have an asset allocation, and, although they may vary a little bit around that stated allocation, it’s pretty easy to get your arms around what it is. Balanced funds are also more transparent because they’re easier to understand at any given point in time and they have reasonable fees, generally speaking, in great part because they’re using major asset classes and not overly diversifying.

But if you’re thinking about performance for the lifetime of a participant, a TDF makes sense. Certainly, TDFs will have more equity exposure for a long time before they reach a 60/40 allocation and then ramp down the equity exposure from there. The higher equity exposure is going to drive performance in the early to mid years.

We believe that, if there’s an understanding as to how the TDFs are investing, performance will mirror how one would expect them to perform. We would suggest that TDF performance has actually held up—even in 2008—when you take asset allocation into account. I’m happy to see that plan sponsors still think target dates have good performance.