PLANADVISER - March/April 2018 - 49

investment-oriented
cial-planning resources cuts across a lot of demographics. "
To get an initial idea of whether it makes sense to consider
switching to a hybrid QDIA, advisers can help plan sponsors
look closely at their participant demographics. " If they know
their demographics are unique in some way-maybe they
have a frozen DB [defined benefit] plan, for example-the
greater the differences in the demographics of participants,
the less likely that a single default investment solution will
be able to satisfy participants' needs, " says Brian Cosmano,
vice president of strategic product initiatives at Great-West
Investments, in Greenwood Village, Colorado.
If a plan has an older and/or heterogeneous population,
this is more reason to consider a hybrid QDIA, Veneruso says.
For instance, the different employee groups in a hospital-
doctors, nurses, support staff and administrative workers-
likely have very different financial circumstances, especially
on the cusp of retirement. " That definitely provides an
argument to go in the direction of something more customized
for the QDIA, " he says.
Awaiting the Early Adopters
Empower Retirement's recently launched hybrid, Dynamic
Retirement Manager, tries to correct two limitations of TDF
defaults, Cosmano says. First, the hybrid can give older
participants a customized asset allocation in a managed
account. " We don't believe that a single target-date fund
can be the right solution for every investor, at every stage
of their life, " he says. " By age 50 or 55, you see some participants
who are in a very good position and others who are
just starting to save. Those are very different positions that
require very different investment allocations. "
And, second, once older participants get switched to a
managed account, they can get help with broader decumulation-planning
issues, such as finding the right rate at
which to withdraw their money once they retire. Empower
has a handful of plan clients that scheduled an early 2018
implementation of its hybrid QDIA, Cosmano says.
With its hybrid Smart QDIA, Fidelity has opted not to
limit sponsors to age only as the trigger for transitioning
to the managed account. " We felt very passionately about
allowing plan sponsors the functionality to use multiple
criteria if they want to do that, " Moorjani says. So, for
example, a sponsor might choose to default participants
into the managed account only when they reach age 50 and
have at least $50,000 in their account.
Fidelity has been actively dialoguing with several sponsors
about using Smart QDIA, but, as of early this past
December, none had yet implemented it. Once a handful of
large sponsors start using the hybrids, sponsor and provider
interest may grow, says Jason Shapiro, senior investment
consultant at Willis Towers Watson in New York City.
" Right now, Empower and Fidelity are the providers actively
marketing these hybrids, " he says. " I have talked to other
providers about this hybrid concept, and they're consistent
in saying that when the demand gets there, they can
create something quickly, from an operational perspective.
Providers have told me, 'We would do this, but we just
haven't seen the demand yet.' "
Not all recordkeepers, however, feel comfortable with
hybrid defaults. The Vanguard Group Inc. has a couple of
concerns, says James Martielli, head of defined contribution
advisory services at the company, in Valley Forge, Pennsylvania.
" One is the engagement. Yes, once participants get
close to retirement, there tends to be higher engagement.
But it's not universal, for sure, " he says. " The second thing-
and the key thing-is that it's about defaulting participants
into a more expensive investment they haven't actively
chosen. When you transition a participant into a managed
account, you have a certain increase in cost, with uncertain
benefits to the participant in return. "
The Value of Customization
Certainly, concern about fees may explain the tentative
sponsor interest so far. Shapiro explains that fiduciaries
under the Employee Retirement Income Security Act (ERISA)
need not offer participants the lowest fee option available,
but they do need to make sure participants get value for the
fees they pay. " So the first question to ask about hybrids is,
'What [is the] cost, and what are the value points my participants
are going to receive in return?' " he says.
If a managed account were cost-competitive with a
TDF, " that [would be] a great service for participants, "
Esselman says. " But, in reality, you're moving participants
into a managed account that probably costs at least 10 to
20 basis points [bps] more than a plan's target-date fund.
Many managed accounts are 50 to 75 basis points, and that's
pretty high, especially if you're defaulting people into those
investments without knowing whether they will engage. "
To justify the fee, sponsors may want to feel confident
that many of their defaulted participants will voluntarily
play an active role once they transition to a managed
account. The challenge with hybrids lies in getting participants
involved and motivating them to use tools such as a
risk-tolerance questionnaire at the time they are defaulted,
Esselman says. " If you can get a 50% utilization rate or
higher on managed account tools, then the added expense
may make sense, " he says. " The actual utilization varies by
plan, but we find that it's often in the 8% to 10% range for
managed accounts. " -Judy Ward
KEY TAKEAWAYS
* Hybrid QDIAs start participants off invested in a TDF
but move them to a managed account when they start
nearing retirement, say at age 50.
* Thus far, only Empower and Fidelity offer the product,
and sponsors have shown limited interest in the plans
or in adopting them.
* Advisers should consider that managed accounts
make sense for older participants, whose financial
situations vary widely and who might be better
served with a managed account than with a TDF.
planadviser.com march-april 2018 | 49
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