PLANSPONSOR - December 2017/January 2018 - 22

Advantages of Going Hybrid
TDFs " are admittedly a pretty blunt instrument, and they take into
account just one aspect about a participant: age, " Veneruso says. A
managed account can incorporate other factors, such as a participant's
outside assets and risk tolerance, in its allocation. " It can
really give participants a more finely calibrated asset allocation,
and that becomes a bigger issue as a participant ages, " he notes.
" It is really as you age that life happens, and, as people near retirement,
they end up with very disparate circumstances. "
The idea behind these hybrid products makes sense, says
Michael Esselman, director of investments at 401k Advisors
Intermountain, in Sandy, Utah, and winner of the 2017
PLANSPONSOR Retirement Plan Adviser Large Team of the
Year award. " When we graduate college, we are all in the same
boat financially. But, as people get older, the gap in their circumstances
and their finances widens. By the time you turn 55, your
financial picture of where you're heading to in retirement starts
to finally become a little clearer, " he says. " If at that point you can
get a customized asset allocation based on a holistic picture of
your savings, it helps. "
According to Verdeyen, the key is to make the transition
from a TDF to a managed account at a time when the participant
can benefit from it the most. " Pre-retirees have a shorter time
horizon to retirement, and they have a more complex financial
picture than younger participants, " she says. Moreover, " among
pre-retirees, the need for additional financial-planning resources
and support cuts across a lot of demographics. "
To get an initial idea of whether it makes sense to consider
switching to a hybrid QDIA, plan sponsors need to 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.
A New QDIA
Step 1
The participant is
initially defaulted
into the plan's
target-date QDIA
based on age/target
retirement date.
Triggering
Event
Age, years of service,
account balance, etc.
Ideally it should be at a
time the participant is
more likely to engage.
Step 2
The participant is moved
into a managed account
QDIA that provides a
customized asset allocation
based on marital status,
additional assets, any DB plan,
tax implications, plan
balance and other
information provided.
If a plan has an older and/or heterogeneous population,
this is more reason for sponsors 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.
Additionally, look at whether defaulted participants have
stuck with their plan's current QDIA, Verdeyen advises. Russell
Investments works with several large plans that have custom
TDFs. " If those sponsors see participants leaving that custom
glide path to go into a managed account, you can see ... they
would be interested in a hybrid QDIA, " she says. Also look at
data on how many older participants are using multiple TDFs or
have added an allocation to core-menu investments beyond their
existing TDF allocation, she suggests. In those cases, " they are
trying to cobble together a more customized allocation than they
can get from target-date funds. "
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 lives, " he explains. " 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 get help with broader decumulationplanning
issues, such as finding the right rate at which to withdraw
their money once they retire. " Managed account services
have financial-planning features that aren't part of a target-date
fund, " Cosmano says. " Especially as they get closer to retirement,
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