PLANSPONSOR - September/October 2024 - 34

INVESTMENTS
A Broad-Based Way to Choose a QDIA
Pam Hess, executive director at the Defined Contribution
Institutional Investment Association Retirement Research Center,
in Washington, advises sponsors to consider their total retirement
program when selecting retirement income investments for their
plan. This holistic approach ensures that the retirement plan functions
cohesively, providing comprehensive support for participants
through their retirement journey, Hess suggests.
It also goes well beyond counting the fees, to the value of the
services paid for and how they integrate with the overall retirement
plan, she says. She quotes a plan sponsor who said, " We're
building a house, not just a room, " stressing the need to connect
all plan components effectively.
Key to any QDIA's success is how well that vehicle will work
for the particular workforce-also important is how committed
the sponsor is to engaging the participants and providing education
and tools for them to make informed decisions.
Sponsors also should consider the possibility that adding
an annuity will have certain consequences because such options
will be hard to remove later, says David Blanchett, portfolio
manager and head of retirement research at PGIM DC Solutions.
" If you add an investment to your plan, and then you don't
like it, there [are] no residual effects, " he says. " But if you add an
annuity-a current committee might think [it's] the best thing
ever-once it's there, it's going to kind of always be there. If
it's in the default, it's really sticky. ... There are residual effects
of adding lifetime income solutions. " -Tom Anderson, Remy
Samuels and Noah Zuss each contributed to this story
RTX Corp.'s
QDIA Experience
R
TX Corp. (formerly Raytheon) offers a compelling case study
of how the use of qualified default investment alternatives
has evolved. The aerospace and defense company added lifetime
income to its plan in 2012 and recently increased flexibility in its
lifetime income strategy. As Ken Levine, executive director global
retirement strategy at RTX, explained in a March PLANSPONSOR
webinar, " We default you in at age 65, but you can choose a target
retirement age anywhere between 60 and 70. " This lets participants
tailor their retirement planning more to their own situation.
In RTX' customized target-date fund suite, participants may
adjust their allocation to secure income from 0% to 100%. " If you
dial it down to zero, you're investing in a highly customized TDF
based on your chosen retirement year, " Levine said. This approach
addresses the 10-to-15-year period before retirement, known as the
" red zone, " which is crucial for building retirement income. By
focusing on this period, plan sponsors can better prepare participants
to transition from accumulation to decumulation.
RTX' plan starts building income 15 years before retirement,
allocating to a secure dedicated portfolio. " It adds a full percent
to the expense ratio when your money is in there, and that goes
to the insurers, " Levine said, adding that the cost increase buys
value in guaranteed income security. -Noah Zuss
Participant Spending Behaviors
R
ecent research from J.P. Morgan Asset
Management highlights the importance
of plan sponsors understanding participants'
spending behaviors when selecting
a qualified default
investment alternative.
By analyzing data from 280,000
households that bank with Chase, the
consumer bank of JPMorgan Chase &
Co., JPMAM identified three key spending
patterns: a lifetime spending curve, a
retirement spending surge and spending
volatility throughout retirement.
Spending curve. The research shows
that a person's spending patterns change
significantly with age, peaking at mid-life
and gradually declining, except for health
care costs, which predictably rise later in
life. Sharon Carson, executive director of
retirement insights strategy at JPMAM
in Newtown Square, Pennsylvania, and
34 PLANSPONSOR.COM September - October 2024
the paper's author, notes that overall
spending growth lags inflation, especially
since health care expenses, a high-inflation
item, increase. Carson stresses the
need for balance, warning against overly
risky investments near retirement: " You
don't want people to be super risky right
at retirement because if there's a market
downturn and they're spending, it could
be very detrimental as they take money
out of their retirement account. "
Spending surge. The data showed
a temporary increase in spending for
partially retired households that had preretirement
incomes
under
$150,000.
These
households, which still receive some
employment income while drawing from
Social Security, pensions or annuities, also
tend to pay off credit debt and build savings
during partial retirement. " So not only are
they spending more, but they seem to also
use that time to get on better financial
footing, " Carson says. This behavior indicates
a need for sponsors to help participants
manage debt and spending early on.
Spending volatility. Around 60% of
households experience spending volatility
in the initial retirement years, which can
create short-term liquidity needs and exacerbate
long-term funding risks. This volatility
persists even as households age and
points to the need for flexible, liquid retirement
income solutions. J.P. Morgan advises
sponsors to offer solutions that manage
risks early in retirement when balances are
highest and the sequence of return risk is
greatest. Having flexibility and liquidity in
guaranteed income solutions is crucial, to
help them adapt to participants' changing
circumstances. -Remy Samuels
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