A new day for the QDIA
There’s no question that the 2006 Pension Protection Act did a great service for investors in defined contribution retirement plans. The development and expanded use of auto-enrollment and auto-escalation of participant contribution amounts have shown1 to be significant improvements to the retirement prospects of many Americans.
One great boon of the now 10-year-old regulation was the creation of the qualified default investment alternative (QDIA). The PPA provides fiduciary protections for plan sponsors who choose a QDIA as their default plan investment option.
Auto features and the QDIA were developed to help drive greater participation in retirement plans. For a variety of reasons, many workers simply would not save for retirement if they were not nudged in some way.
Despite every success of the PPA, in the ensuing decade since President George W. Bush signed the bill in to law, there has not been much in the way of industry attention on innovating what’s possible with QDIA options.
Empower Retirement, in conjunction with our colleagues at Great-West Investments, is proposing a new model that joins the benefits of a competitive investment option, like a target-date fund, with a managed account into a dynamic QDIA.
The details behind this new model are spelled out in a new white paper we just published, In Search of a More Dynamic QDIA.
The new model is based on research and development work that examines how some participants’ perception of retirement and their financial decision-making evolves over the course of their working years. Some individuals, who are less interested in retirement planning in their early working years, are likely to become increasingly engaged as they move into the middle stage of their career, according to findings.
For example, many 22-year-olds who are starting their first jobs, renting their first apartments and paying down student loans may not be prioritizing retirement planning to the extent that they will later in their respective careers.
The new offering is designed to solve for that participant behavior by leveraging existing QDIA regulations to direct participant savings into a competitive investment option, such as a target date fund2, early in their careers. Later on, when a pre-determined set of criteria is triggered, the participant will shift into a managed account, thereby offering the opportunity to receive more personalized asset allocation and advisory services as they begin to focus on the transition to retirement.
We believe that, on average, by the time most people are transferred into a managed account, their interest in retirement planning will have grown to the point where they are open to having more discussions about their financial goals, personal needs and retirement plans.
Dynamic QDIA is made possible by advances in behavioral finance research, financial planning and investment solutions which, taken together, create an opportunity for new models to help under-engaged participants.
Later this year, Empower will launch a new dynamic QDIA product for use in the 32,000 plans that we administer on behalf of 8 million plan participants.
The point of the dynamic QDIA model is to meet participants where they are today, and help them get to where they want to be tomorrow.
Ultimately, we believe that this model will help drive improvements in participant retirement outcomes — and that’s what the QDIA was designed to do.
1. Lifetime Income Score VI: The Road Best Traveled April 2016 published by the Empower Institute.
2. Generally, the asset allocation of each target date fund will gradually become more conservative as the fund nears the target retirement date. The date in a target date fund’s name is the approximate date when investors plan to start withdrawing their money (which is assumed to be at age 65). The principal value of the fund(s) is not guaranteed at any time, including at the time of the target date and/or withdrawal. For more information, please refer to the fund prospectus and/or disclosure document.
Great-West Financial® and Great-West InvestmentsTM refer to the investment, insurance and investment advisory products and services offered by Great-West Life & Annuity Insurance Company (GWL&A), Greenwood Village, CO; GWL&A of New York, NY, NY; their subsidiaries and affiliates, including Advised Assets Group, LLC (AAG), a federally registered investment adviser. More information about AAG can be found at www.adviserinfo.sec.gov.