There’s a reason that Managed Accounts (MAs) don’t—and can’t—work as a Qualified Default Investment Alternative (QDIA):
Defaulted participants do not want to engage, so MA providers must rely on the data available from the plan’s recordkeeper. But this tells you very little about the participant.
MAs can—and do—work for non-defaulted participants because they do want to engage, but such usage is by definition not a QDIA because this participant has not defaulted.
MAs for the masses are automated, akin to Robo advisors. They might use questionnaires, but this is complicated by the unwillingness of defaulted people to engage. Instead, most MAs use lifetime glidepaths like a target date fund uses, and move off the path based on participant information maintained by a recordkeeper. This recordkeeper data says very little about the participant’s wealth unless that participant has never worked elsewhere, and all his/her savings are in the 401(k) plan. In other words, you can’t know the wealth of just about anyone in a 401(k) plan unless they tell you.
Where MAs do work
Corporate executives get personalized—non-automated—advice that can be considered a Managed Account, but these executives do not default, so these MAs are not QDIAs.
This form of personalization has been promoted as a better alternative to one-size-fits-all-set-it-and-forget-it target date funds (TDFs) but that is an apples-to-oranges comparison. It’s true that TDFs do not even pretend to know anything about the participant, but neither do MAs although they pretend to.
A blend of MAs with TDFs can work, but only for non-defaulted participants.
Enter personalized target date accounts
Personalized target date accounts (PTDAs) that blend MAs with TDFs are relatively new, but most make the big mistake of trying to be QDIAs. PTDAs promote—rather than hide—their reliance on glidepaths and typically provide several glidepaths with varying risk levels. Like MAs these PTDAs use recordkeeper data to infer an appropriate level of risk. And also, like MAs, this data will not reveal wealth for anybody, so the risk decision is misinformed.
PTDAs only work for non-defaulted participants because they are happy to work with a system to make an informed risk decision and value the ability to change that decision at will. They manage their own unique target date account.
About $1 trillion of the $3.5 trillion in TDFs is from non-defaulted participants, so an important group that relishes assistance.
A benefit for sponsors and defaulted participants
Since PTDAs do not work as QDIAs, what can be done for defaulted participants? The plan sponsor can use the PTDA framework to set allocations for defaulted participants. In this framework, the sponsor chooses the glidepath—say low, middle or high risk. And the sponsor specifies retirement age that the PTDA “sees” as the day the participant retires rather than grouping into 5- or 10- year cohorts, so much more precise when it matters most—near retirement.
Defaulted participants benefit from a more customized decision, rather than settling for a simple off-the-shelf single path TDF. Another benefit is that PTDAs use best-in-class investment funds rather than all-proprietary funds in most TDFs.
Conclusion
The debate continues between the two most popular QDIAs, but it misses some very important points:
- MA “personalization” uses recordkeeper data that does not reveal wealth, a key consideration for making a sensible risk decision.
- Combining MAs with TDFs to make PTDAs makes some sense, but not as a QDIA.
- PTDAs work for non-defaulted participants, and the PTDA infrastructure gives plan sponsors more flexibility in their QDIA decision.
- Most PTDAs are offered as QDIAs; that’s a huge mistake. There are only a couple PTDAs specifically designed for self-directed participants, with the additional benefit of giving plan sponsors more control over their QDIA selection.
QDIAs will always be very hard to do “right” because you cannot know a client who dies not wanting to be known, but we can and should help the many self-directed non-defaulted participants who do want to be known and understood.
SEE ALSO:
• Why a Crash Like 2008 Would Decimate Boomers in TDFs