This Message is for Rich People Only: Abandon Your QDIA!

Ron Surz

2 hours ago

If you’ve watched a comedy show on a cruise ship, you’ve probably heard this joke:

Images and graphics courtesy of Ron Surz

The captain issues a public address: Attention. This message is for the crew only: Abandon ship!

Jokes aside, rich people who are near retirement in Qualified Default Investment Alternatives (QDIAs) are not safe. They need to get out before the next stock market crash (the ship sinks). Rich people in retirement savings plans include the executives and owners of the sponsoring companies. The QDIAs that expose them to too much risk are Managed Accounts (MAs) and Target Date Funds (TDFs).

As shown in the following graph, rich people are in jeopardy because they have more to lose; a crash will change their lives. Poor people won’t feel the next crash much.

Here’s why rich people who are near retirement need to abandon their QDIAs.

Managed Accounts

MAs are target date glidepaths masquerading as personalized decisions. They use recordkeeper data to estimate the wealth of the participant and to take more risk for the wealthy because they can afford it. The greater the wealth, the greater the risk. But most wealthy people like being rich so they hate losing money.

MAs come in two forms. MAs as QDIAs have no participant input. This contrasts to MAs that are face-to-face decisions with an investment advisor which is not a QDIA because these accounts are affirmatively managed rather than defaulted.

QDIA MAs use Risk Capacity—the ability to take risk—when what actually matters is Risk Tolerance—the appetite for risk. Consequently, rich people take high risk in MAs; a risk they really don’t want.

Rich people in MAs need to abandon them now because they are too risky for them.

Target Date Funds

The problem with risk in TDFs is more nuanced because their glidepaths do in fact reduce risk through time, but this reduction is far from adequate—and not even close to the academic theory near retirement that they say they follow.

Here are the main academic articles that integrate human capital with financial capital to establish lifetime investing paths:

Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance, 4/1/2007, Roger G. Ibbotson, PhD, Moshe A. Milevsky, Peng Chen, CFA, and Kevin X. Zhu

Lifetime Financial Advice: A Personalized Optimal Multilevel Approach, 2/15/2024, Thomas M. Idzorek, CFA and Paul D. Kaplan, CFA

In contrast to theory that it is very safe for people near retirement, the typical TDF is 85% risky with 55% in equities plus 30% is long-term bonds. This is the mix that lost more than 30% in 2008.

Rich people in TDFs who are near retirement need to abandon them now.

The next crash

When (not if) the stock market crashes, all investors will suffer, but those near retirement will suffer most because they are in the Retirement Risk Zone, when sequence-of-return risk devastates lives that are too short to recover. Rich people suffer substantial reductions in their standard of living, and their heirs feel it too. Poor people not so much.

Rich people near retirement need to protect themselves now. QDIAs will become safer after the next crash, but it will be too late for current investors.

“Dingbat” got it right in the popular 1970s TV series All in the Family when Edith Bunker proclaimed, “I don’t want my money to work. I want it to relax.”