Most defined contribution (DC) plan participants invested in a qualified default investment alternative (QDIA) refrained from trading in the first quarter, despite the tremendous decline in the market and subsequent volatility, David Blanchett, head of retirement research at Morningstar Investment Management, told attendees of the “Managing Through the Crisis: The State of QDIAs” webinar sponsored by the Defined Contribution Institutional Investment Association (DCIIA), The Retirement Advisor University, the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute and The Plan Sponsor University.
Only 2% of those invested in a managed account made a trade and only 2.1% of those invested in a target-date fund (TDF) made a trade, Blanchett said. By comparison, 17% of participants who self-direct their investments made a change, and 22.7% of those invested in more than one TDF vintage made a change, he noted.
“You don’t want them trading because this hurts them in terms of long-term performance,” Blanchett said.
Speaking to PLANSPONSOR, Doug McIntosh, vice president of investments at Prudential Retirement, says participants have so far fared better during the COVID-19 crisis than in the Great Recession of 2008 because of the increased use of TDFs as the QDIA. In 2008, 60% of plans used TDFs as the QDIA; today, that number has risen to 97%, he says.
In addition, “today, TDFs have generally taken down risk for those closest to retirement,” McIntosh says.
“The glide paths have gotten more conservative,” he adds. “As well, there are a broader set of asset classes being utilized, such as TIPS [Treasury inflation-protected securities] and private real estate, to minimize equity volatility and inflation.”
During the webinar, Liana Magner, partner, U.S. defined contribution and financial wellness leader, Mercer, said the scaled back equity exposure in TDFs has made a difference: In 2008, they suffered a 14% decline, whereas in the first quarter of 2020, they went down by 10.4%. “This is mostly because they have less exposure to growth,” she said. “Long-term bonds have helped as well.”
However, McIntosh says he believes TDFs need to become even more conservative, noting that some 2025 TDFs lost 20% to 25% of their value in the first quarter of 2020. “If I am only five years out from retirement, that is a concern,” he says.
Magner said the key question is how the COVID-19 crisis will affect the TDF marketplace. “Will they take on more downside protection?” she asked. “Will there be more focus on retirement income? Will there be more use of custom funds? It will take some time for the investment managers to become more strategic, but we do expect a reinvention phase.”
The Setting Every Community Up for Retirement Enhancement (SECURE) Act encourages plans to offer guaranteed income solutions, McIntosh notes. He says he believes that should be part of the QDIA.
Sharon Scanlon, senior vice president, head of CX, Individual Life & Annuity Ops and Retirement Plan Services, Lincoln Financial Group, told webinar attendees that investors in her company’s products also refrained from trading during the first quarter.
Moving Away From TDFs
Joe DeNoyior, president of HUB |Washington Financial Group said, “One of the most important challenges plan sponsors face is determining the appropriate QDIA for their workforce.” He explained that the 2008 crisis showed that not all TDFs are created equal—some can mitigate volatility, some are tactical—and TDFs have become more sophisticated. “We think sponsors should expand their due diligence. Plan sponsors need to scrutinize their default options looking at their demographics and taking a view through participants’ eyes,” he said.
DeNoyior noted that in the past five years, more of HUB | Washington Financial Group’s clients have been considering managed accounts. DeNoyior expects more sponsors will adopt them, particularly as the expanded use of automatic enrollment and automatic escalation has resulted in higher balances.
“They can provide for different risk tolerance and tend to have stickier assets,” he said. “Once the dust settles from this crisis, we think plan sponsors will be more inclined to use managed accounts as the QDIA, or at least offer it in their plan.”
McIntosh says he expects managed accounts, as well as TDFs, will increasingly pair actively managed fixed income with low-cost passive asset management.
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