PLANSPONSOR - October-November 2022 - 25

INVESTMENTS |COVER STORY
to a managed account. Such engagement can inspire an individual
to start thinking about retirement, he says.
That, in turn, can lead to interest in having a financial plan
and provide an opportunity for the plan adviser to provide counseling
and guidance. The ultimate outcome can be a participant
who is more prepared to make the transition from accumulating
assets for retirement to decumulating them once having left
employment, he observes.
Plan sponsors thinking about adopting that strategy, Voris
says, should make sure the methodology of their target-date
funds is in sync with that of the managed accounts. If the fund
family is passively managed, for example, the managed accounts
should be as well.
In another twist on customizing QDIAs, Doshier says, he
has also been speaking to some advisers who are starting to
advocate for automatically enrolling some worker cohorts into a
Roth 401(k), rather than a traditional 401(k).
" Many people who are at low incomes or tax brackets today
will likely be at higher tax brackets tomorrow, " Doshier says, as
incomes typically go up over time. So those individuals might
be better off paying their taxes upfront now, while their tax rate
is lower.
Risks and Other Options to Consider
Some experts think having multiple QDIAs in a plan could prove
too risky for plan sponsors.
" I believe that target-date funds will become more customized
by plan sponsors over time, but right now there's a lot of
risk involved with that, " says John Hume, vice president at Segal
" ... managed
account programs
have come a
long way in
terms of the data
points and the
personalization,
and customization
has increased. "
Marco Advisors in Boston. " You're seeing lawsuits all around. "
Plan committees considering implementing such a structure
should carefully document their decision process, Hume
adds. " You would have to follow a process that's reasonable,
with an investment consultant and a plan design consultant
and a communications consultant. They would have to all come
together and come up with a strategy that's based on your plan
population, " he advises.
That documentation should include not only the reasoning
behind using the particular QDIA, but also the thought process
behind the decumulation strategy, if the managed accounts
include one, Voris says.
Given that managed accounts often require more engagement
from participants than do target-date funds-to help the
manager customize allocation-one solution might be to require
participants to complete an education component before moving
them from a target-date fund to a managed account option,
Hume says.
Dynamic QDIAs are preferable to an approach that uses two
completely separate QDIAs within the plan, because the latter
route could cause confusion among participants, says Katie
Hockenmaier, U.S. defined contribution research director at
Mercer in San Francisco.
" It could also foster dissatisfaction if a participant receives
targeted communications that one set of funds is intended for
them, while they actually believe they belong to a different cohort
with a different set of funds intended for use, " she says.
And having multiple QDIAs could actually stimulate misuse.
" A sponsor can't restrict participants from using certain funds
while permitting other participants to defer into those funds, "
Hockenmaier explains. " If two or more QDIAs are offered, it's
possible that participants who are intended to use one QDIA may
opt into another one that's not deemed as appropriate. "
Still, Hockenmaier says, with careful planning and communication,
a dynamic QDIA could work, and she has seen a small
number of plan sponsors implement them successfully. Another
solution involves two separate plans, each with its own QDIA.
That option is popular among plan sponsors with a cohort of
employees who have a legacy defined benefit plan along with
their defined contribution plan assets.
" Sometimes, two DC plans are created where those with a
DB benefit fall under one DC plan, as they will have a specific
plan and investment design, given that they have known outside
company assets that may affect their savings behaviors; those
without a DB benefit fall into a separate DC plan, " Hockenmaier
says. " Given that the plans are technically separate and participants
have varied needs, two different QDIAs could be offered,
one for each plan. "
In that case, the separation between the two plans makes it
easier for participants to understand and use the two different
QDIAs, she says. -Beth Braverman
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