Nathan Voris, managing director, strategy, at Schwab retirement services in Richfield, Ohio, says managed accounts are growing in terms of market share. He says that “88% of the eligible defined contribution plans Charles Schwab administers offer either managed accounts or advice as an option.”
“I’ve noticed anecdotally that the consultant community is conducting more due diligence regarding using managed accounts as the QDIA. If the consultants are starting to dig in to the details, then that’s a leading indicator that there will be some growth around the corner.”
Schwab recently built out the capability to offer dynamic qualified default investment alternatives (QDIAs), which are also called hybrid QDIAs.
The entry point for a typical hybrid QDIA is a target-date fund (TDF). But the thought behind a hybrid QDIA is that TDFs may lose their usefulness over time and moving into a more individualized investment option that considers more specific participant information may serve as a better choice when a participant reaches pre-retirement age.
Voris says, “Although we have the capability to offer dynamic QDIAs to our sponsors, when managed accounts are included as a QDIA, they are typically used as the QDIA for all participants in the plan rather than just a segment of participants.”
Lorianne Pannozzo, senior VP, workplace planning and advice in Fidelity’s Boston office, says interest is really picking up on hybrid QDIA’s.
Hybrid solutions by definition start as a simple and cost-effective balanced fund or TDF, and morph into a professionally managed account when the account balance becomes large enough to make additional customization worthwhile.
Pannozzo says, “The number of questions we’ve been receiving from sponsors and consultants has increased, however, we don’t have any who have done that. I’d say that it’s still in its evaluation stage and sponsors are taking baby steps towards it but not making what Fidelity calls its Smart QDIA the standard for their plan.”
In Fidelity’s Smart QDIA, plan sponsors enroll employees in either a TDF or a managed account–Pannozzo says it does not necessarily have to start as a TDF then evolve to a managed account. “If a participant meets certain eligibility and criteria determined by the plan, then their initial default could be the managed account and each year after, they are re-evaluated to ensure they still fit the criteria assigned by the sponsor. Simply put, some participants will default to a TDF and eventually switch to managed account default over time as their situation changes and the criteria set forth is a fit, but it doesn’t have to happen in that order or sequence, it is unique to the participant situation and sponsor criteria.”
Roughly one-quarter of Fidelity’s plan sponsors offer a managed account, and the number of individuals using Fidelity’s workplace managed account solution has grown 400% over the last five years. Nearly 50% of employers on its platform with 5,000 or more employees offer managed accounts.
When asked why plan sponsors are slow to adopt managed accounts as the QDIA, Pannozzo said, they are still evaluating. She said that the first step is to make managed accounts available on their platform. Then they should do more campaigns around the active opt-in.
But in general, Pannozzo says, features like this take a while to adopt. “For example, auto enroll had been around for a super long time but it didn’t take off until the Pension Protection Act in 2006. Two percent of plans had auto enroll in 2006 and now one-third of plans have auto enrollment.”
Pannozzo continues, “The same trends were there. Early on sponsors were concerned about enrolling employees in something they didn’t actively select. That same parallel exists today with managed accounts. They’ve done that with a QDIA around a target date and I think they are still in the testing phase for the managed account before they feel that comfort in making it the default solution for someone who may not have selected it.”
« Nondiscrimination Testing Part II: Test Methods and Corrections