PLANSPONSOR - December 2018/January 2019 - 44

benefits, tends to retire early, or includes many older new hires.
Plan sponsors can build a glide path that starts at a risk level
appropriate for that unique staff and evolves and ends where it
specifically should.
" With a customized glide path, the plan sponsor has more
control over how [that] changes, over time, " Shapiro says. For
instance, the plan sponsor might freeze or close a DB plan, or
participants might start retiring later.
The second reason a sponsor might consider custom TDFs
is it wants to build portfolios that includes more esoteric asset
classes, Shapiro says. Perhaps a plan sponsor would like to increase
exposure to real estate investment trusts
(REITS), emerging market debt or hedge
funds, for example, or wants the targetdate
fund to invest in other funds also
available on the core menu.
If a plan sponsor believes in diversification
and wants exposure to assets not
usually seen in off-the-shelf products, a
move to customization may be warranted.
Balanced Funds
A balanced fund is typically 60% invested in equities and 40% in
fixed income; it earns the " balanced " moniker from maintaining
that balance.
Shapiro observes that, depending on the glide path, targetdate
funds may start with 90% equities and end up with 30%
in equities at the time a participant retires-which would be
more conservative than a balanced fund. The expected value may
be about the same for both options, but, considering downside
Plan sponsors
may also
Managed Accounts
Managed accounts are a custom approach
to investing versus the set-it-and-forget-it
process that TDFs are known for. Besides
accounting for a participant's age, a
managed account may also consider data
points known to the employer, recordkeeper,
or managed account provider
such as gender, compensation and
marital status, as well as data gathered
from the employee about outside assets.
Managed accounts may offer value that makes the fee
reasonable, Shapiro says, but often this depends on whether
participants provide all of the information needed to properly
customize their portfolio.
He points out that a hybrid QDIA offering-one in which
participants first save in a TDF, then move to a professionally
managed account at a target such as age or account balance-was
recently introduced by a few major recordkeepers. The belief is
that participants will be more engaged and likely to provide more
information the closer they get to retirement. The option has not
yet gathered many plan sponsor clients, though.
Shapiro notes that the idea of the hybrids is still in its infancy
and he thinks costs could still come down. Further, the logistics
and responsibilities need more thought, but large recordkeepers
say they have the capability to support this alternative, he adds.
Faustino says plan fiduciaries should keep abreast of new
market offerings that may align better with their participants'
needs. This can include TDFs with lifetime income options built
in, as well as professionally managed accounts. " Market innovation
and fee compression could make managed accounts more
attractive, " he says.
42 PLANSPONSOR.com December 2018 - January 2019
potentially
move to a
different
risk-level
TDF series if
participant
demographics
change.
risk, the balanced fund experience is substantially different.
" The balanced fund will have less in bonds, which tend to do
well when equity goes down, whereas the
TDF will have more in bonds, " he says.
However, Faustino says, a balanced
fund, or target-risk fund, could be a good
option if the plan, overall, has participants
with similar demographics and is more in
need of a consistent risk allocation. One
factor to consider is whether participants
have access to a DB plan or other steady
stream of income. " The more stable other
assets are, the more risk participants can
take within their DC plan and vice versa, "
he says. " If participants already have a
base level of income in retirement, it may
make sense to use a balanced fund or
target-risk fund as the plan's QDIA. "
Shapiro says Willis Towers Watson
always encourages plan sponsor clients
to stay educated, understand trends, ask
questions and, when appropriate, do a
deep-dive evaluation of their QDIA's
appropriateness. It should be discussed as part of the normal
investment monitoring process.
According to Faustino, since the DOL in 2013 encouraged
more choice and more nonproprietary QDIAs, there has been
some change, but he hopes to see further evolution, specifically in
terms of retirement income features such as longevity annuities
being associated with TDFs. " We think there's a lot of demand
for that, " he says, " and we believe assets managers can provide
solutions to meet income and longevity needs. " -Rebecca Moore
KEY POINTS
* The QDIA, like all plan investments, must be
monitored regularly and changed if necessary.
* The majority of sponsors use a TDF as their plan's
default investment, but the DOL stresses they should
fully understand the fund family's glide path.
* Managed accounts, balanced funds and target-risk
funds should be evaluated for possible use as the
QDIA, based on plan demographics.
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