PLANSPONSOR - December 2017/January 2018 - 23

people need help with much more than their asset allocation. "
Empower has a handful of plan clients scheduling an early
2018 implementation of its hybrid QDIA, says Cosmano. Plan
sponsors decide on the criteria for when participants transition
from one investment to the other, but Empower likes to use
reaching age 50 as the prompt. " This is typically when participants
really become more actively engaged in their retirement
plan, " he says. " You're getting participants engaged [in a managed
account] at a time when they're more likely to want to be engaged. "
Fidelity still sees TDFs as the right default for a majority
of participants, Moorjani says. " But when you have participants
with more complexity-maybe they have multiple 401(k)
balances at previous employers, and maybe their spouse has
a retirement plan-that's when managed accounts become a
better way for participants to think about
retirement savings. "
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 once they both reach age 50 and
have at least $50,000 in their account.
Fidelity has been actively dialoguing
Shapiro explains that, as fiduciaries under the Employee
Retirement Income Security Act (ERISA), sponsors need not
offer participants the lowest fee option available, but they do need
to make sure that 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 that my participants are going to
receive in return?' " he says. " If you move to one of these hybrids
from low-cost target-date funds, you are going to have to justify a
pretty large marginal fee increase.
" If hybrid solutions were being offered at the exact same
Plan sponsors
decide on the
criteria for when
participants
transition from
one investment
to the other.
with several sponsors about using Smart
QDIA, but, as of early December, none
had yet implemented it. " This is a plan-design change and not
just a switch you flip, " Moorjani explains. " The clients that are
interested typically are more paternalistic or maternalistic, and
they want to be bigger advocates of employees and their retirement
savings. " Some interested sponsors already have a relatively high
number of participants chosing to switch into a managed account;
these sponsors are assessing whether it makes sense to default
participants into a managed account at some point, she says.
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.' "
The Value of Customization
Concern about fees may explain the tentative sponsor interest so
far. " With managed accounts, you're paying not only for the underlying
asset management but also for a managed account provider, "
Veneruso says. " So that can lead to higher fees for participants. "
price as low-cost target-date funds, you could argue that many
plan sponsors would [switch], " Shapiro continues. " But that's
not realistic, of course-there should be a fee difference for
managed accounts. " At some point on the fee spectrum, plan
sponsors would start to find hybrids
more attractive, he says. " But we haven't
seen enough movement in managed
account fees yet to know at what point
sponsors will become more interested in
implementing these hybrids, " he adds.
If a managed account were costcompetitive
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. " With managed
accounts, to get the full value out of the service, ideally participants
need to engage: to provide information on their outside
assets, risk tolerance and retirement objectives, " Shapiro says.
" In a default-investment construct, by its nature, you're going to
have less participant engagement. "
The challenge with hybrids lies in getting participants
involved, motivating them to use tools such as a risk-tolerance
questionnaire when they are defaulted into a managed account,
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. "
It boils down to the employer's commitment to communicating
the need for participants to play an active role, as well
as their doing so, Esselman says. An employer may have, for
example, a large percentage of lower-paid employees who work
remotely and have little access to a computer. " When you get
into that kind of worker demographic, the vast majority will not
engage with a managed account, " he notes. In contrast, a work
PLANSPONSOR.com December 2017-January 2018 23
http://www.PLANSPONSOR.com
PLANSPONSOR - December 2017/January 2018

Table of Contents for the Digital Edition of PLANSPONSOR - December 2017/January 2018
