Comprehensive Retirement Plan Solution Overview (Video)

Offering a retirement plan can help your organization attract and retain talent, but running a successful plan is a complex undertaking. Staying on top of investments and keeping up with the ever-changing rules can be confusing and take up valuable resources. PlanPILOT’s comprehensive retirement solution makes it easy for you.

We deliver conflict-free solutions that bring simplicity to complex situations to save time, minimize risks, and improve plan incomes. Watch this quick video to learn more about our approach and our three keys to a successful plan.

Evolution of the QDIA. Is Your Plan Due for a Review?

By Mark Olsen, Managing Director at PlanPILOT

The Pension Protection Act (PPA) of 2006 introduced a groundswell for the growth of defined contribution (DC) assets in qualified default investment alternatives (QDIA). It also created a windfall for asset managers who provided QDIA investments, particularly those affiliated with a recordkeeping platform. Over the last 16 years and counting, the QDIA market has evolved in theory, but with limited implementation of newer ideas. This article offers a quick hit on where we have been, provides a high-level summary of the range of QDIA offerings in today’s marketplace, identifies key assessment and decision points, and provides insight for plan sponsors to consider when evaluating their current QDIA relative to the range of newer offerings in the marketplace. 

A Look Back in Order to Look Forward…

While likely rudimentary to most of us reading this article, refreshers can be valuable when assessing current state. When money is contributed to an employee’s retirement account and no investment election has been made, the money can then be defaulted into a QDIA. The Department of Labor (DOL) advises that a QDIA must be “diversified so as to minimize the risk of large losses.” Three types of QDIAs are considered safe harbor:

  1. A mix of investments that factor in a participant’s age or retirement date—known primarily target-date solutions (TDs)
  2. An asset mix based on a participant’s current contributions and existing plan options that also considers the person’s age or retirement date (among other metrics)—known as professionally managed account services (MAs)
  3. A mix of investments that accounts for the demographic characteristics of all employees—known as balanced funds (BFs)

The winner over the last almost two decades has been TDs, which have amassed the vast majority of DC market share. According to Morningstar, 98% of DC plans offer a TD and 80% of all 401(k) of participants are invested in one. (1) Simply put, out of the gate, TDs gained momentum in investment management-bundled solutions connected to recordkeeping platforms. After the passage of PPA, plan sponsors tended to select TDs affiliated with their recordkeeper given the newness of the solution and (presumed) ease of decision-making and bundled pricing. MAs picked up very little in the way of default assets, and the use of balanced funds as the default was and remains a very distant third. As the years have passed, TDs have remained the primary default offering, but the landscape of TD providers has expanded. (2) MAs have gained momentum, but primarily as an add-on service, meaning the concept of a “completion portfolio” such that MA offers is appealing—but tends to be on platforms as an “opt-in” and pursued by participants who have higher asset balances, more complex financial situations, and those nearing retirement or moving into retirement. The balance of this article will spend time on the evolution of TDs and MAs, as BFs have not garnered assets due to the static nature of the solution.

Simplicity No More

What began as a rather oversimplified approach to selecting an appropriate QDIA (i.e., default to the recordkeeper’s offering) has transitioned into a more complex proposition (and rightly so). After all, sponsors have become more aware that the QDIA selection is arguably one of the most important decisions a plan fiduciary can make. Plan sponsors must consider a litany of critical factors in the evaluation process of a QDIA, each with the potential of having a material impact on establishing plan suitability and participant outcomes. Below we summarize many of the most critical assessment and decision points:

  • Off-the-shelf or custom strategy: Preference for a pooled provider solution (most often also a single investment manager) or a solution tailored to plan circumstances (most often with open architecture and multiple investment managers)
  • Asset allocation: Asset classes and sub-asset classes that underpin the asset allocation of QDIA
  • Glidepath: The way asset allocation transitions over time with participants 
  • Investment implementation: Passive, active, or blend investment management
  • Tactical or dynamic management: Periodic trading within asset classes and investment strategies based on market environment 
  • Retirement income strategies: Embedding income solutions such as guarantees or non-guaranteed payout strategies 
  • Hybrid QDIA: Migration from one QDIA to another (e.g., target date to managed accounts) 
  • Other considerations: Assessment of ensuring a commensurate trade of value-for-cost, access on recordkeeping platform, etc.

Broadly speaking, the needle has not moved significantly in terms of where the assets reside just yet, but many plan fiduciaries have begun to evolve their approach and/or consider alternatives. There are many examples of evolution that indicate traction may increase over time to newer solutions. To start, it is most common today for sponsors to consider the wide-open landscape of competing QDIA providers instead of merely defaulting to the plan sponsor’s recordkeeping QDIA solution. (3) Also, many large DC plans (~$1B +) have either considered or have migrated to custom target-date solutions. As well, the market has moved from a binary investment management approach of active or passive investment management to including blend strategies that incorporate both. And, more recently, there are several providers that offer a hybrid QDIA—or a QDIA that starts the glidepath journey as a TD and migrates to an MA as a participant moves closer to retirement. Not to be overlooked is the ever-expanding continuum of QDIA offerings that incorporate retirement income strategies, ranging from an embedded guarantee to an endowment model with a target yield. 

So, What Should a Plan Fiduciary Do?

Likely evident at this point is that the process for evaluating which QDIA is most suitable for your plan is not straightforward. Instead, it is iterative and even meandering…and quite dependent on plan circumstances and objectives, participant and demographic needs, and committee beliefs and philosophies. Further, the regulatory and legislative environment continues to change such that relooks are a valuable way to consider those changes and focus areas. Perhaps the most important takeaway from this article: if you are a plan fiduciary, it is important to gain awareness of the growing range and complexity of the QDIA landscape. It is vital to understand the evolving marketplace and take an opportunity to assess your plan needs accordingly. As with anything DC related, there is never a single right answer (i.e., process is most important) and nothing about DC is static (i.e., be attentive to the fluidity of the offerings in the marketplace and suitability for your plan). 

Conclusion

A QDIA review can actually be looked at as a gateway for your plan committee to clarify plan objectives. Ultimately, we hope this article encourages plan sponsors to lift their heads up and consider (or reconsider as the case may be) if your committee is due for a deeper look at your QDIA given marketplace evolution and changing plan needs. 

Want to learn more? Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

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(1) https://retirementincomejournal.com/article/target-date-fund-assets-grow-to-3-27t-morningstar/
According to Morningstar, 98% of 401(k) plans offer a target date and 80% of all 401(k) participants are invested in a target date.

(2) https://www.cnbc.com/2022/03/06/target-date-retirement-funds-work-up-to-a-point-when-to-reconsider.html
According to Morningstar’s 2022 Target-Date Strategy Landscape Report, five providers control 79% of TD assets as of March 2022 (Vanguard, Fidelity, American Funds, BlackRock, and State Street).

(3) https://www.plansponsor.com/research/2021-target-date-fund-survey/?pagesec=2
Callan’s 2021 DC survey reported that only 23% of plan sponsors used their recordkeeper’s target-date in 2020 compared to 67% in 2010.

Retirement Income Is Front and Center. Should Your Committee Consider the Pursuit?

By Mark Olsen, Managing Director at PlanPILOT

Retirement income services and solutions have remained an overarching theme in the defined contribution (DC) space for many years—yet to date, implementation and traction has remained limited. The need to help plan participants translate retirement savings into income is real and well understood. In equal form, the layers of complexity and variation in approaches have influenced the tepid pace of adoption thus far. In this article, we will offer a backdrop of complicating factors, summarize key retirement service and solution concepts, and provide suggested activities for plan sponsor consideration.

The Perpetual Cycle of Retirement Income

All parties involved in DC plans have a keen understanding of the actual need to assist retiring participants in the draw-down of their retirement savings. What remains in question are several matters: who is the responsible party in the setup, who should bear the cost, and what are the solution(s) best suited to meet the need. Plan sponsors broadly know they have a role in solving what can be referred to as the “retirement income conundrum,” but they also know they cannot do it alone. In fact, they are beholden to partners such as recordkeepers, asset managers, and even insurance companies to be able to offer solutions. 

As if the reliance on provider partnerships were not complicated enough, over the last decade, legislative and regulatory bodies have sharpened their focus on retirement income, adding pressure to sponsors to get it right. This has put plan sponsors at the center of a complex pursuit. Market studies and surveys suggest that retirement income services and solutions are a top priority, yet the vast majority of plans have limited retirement income optionality available to their retiring participants. According to the PIMCO’s Defined Contribution 2022 Consultant Study, reviewing retirement income solutions is identified as the number-two priority of plan sponsors, second only to review of target-date funds. 

Does all this mean we are doomed for retirement income to be in a perpetual infancy stage? 

Influences and Hesitations

As with anything, it is very easy to find reasons why not to do something. The list of influences on the fits and starts of retirement income solutions is quite long. Providers (asset managers, recordkeepers, insurance companies, etc.) have to build revenue-positive businesses to make the investment of time and money worthwhile. Who bears the cost of the setup and accessibility on recordkeeping platforms is a significant contributor to pauses and delays. We also remain in a state with a hangover of some recordkeepers still working to maintain asset management, which creates another layer of complexity in introducing new solutions and services on captive platforms. 

Further, and perhaps the biggest debate, is whether to default participants into a ready-made solution with retirement income optionality or give choice. Many studies reveal that the lens of most plan sponsors and consultants is that there is not a single right solution that will magically satisfy the retirement needs of all individuals. Rather, there is broad preference to focus on plan objectives, individual needs and unique circumstances, and participant demand to inform the pursuit.

Realistic Steps

There are countless lists and grids available that position retirement income solutions and services accessible in the marketplace. Broadly, the range of options out there includes solutions that are in or out of the DC plan, include guarantees or non-guarantees (annuity or endowment like payouts), and incorporate advice and services to help participants identify a direction suitable to their needs. Broadly, it is safe to say that the legislative and regulatory bodies have strongly signaled support and encouragement for plan sponsors to make available solutions and services to help participants draw down their retirement assets. 

Our position is that most, if not all, plan sponsors are wise to engage on the topic to establish their plan’s position on the topic. An important starting point is for committees overseeing plan assets to establish their objective for retiring participants—the role of the plan and if they wish to assist participants in the post-retirement phase. Important considerations include: 

  • Determine if you want assets to remain in the plan at retirement.
  • Establish a view on whether a single solution or range of services and solutions are most suitable for the plan, and which type(s) align to your participant needs. 
  • Learn which offerings your recordkeeper has on their existing recordkeeping platform and assessing if they meet your plan needs.
  • Discuss your committee’s views on suitability of guarantees and non-guarantees, and preference of offering solutions in or out of the plan, and 
  • Develop a timeline to inform your path forward.

The Bottom Line

All in, there simply is no single right way to tackle the complex topic of retirement income. Doing this work does not mean the result for every plan sponsor is that retirement income solutions or services will be added to the plan. However, we believe it to be beneficial for all committees to engage in productive dialogue on the topic and answer key questions about your plan to determine the right path forward. There are resources available to help untangle and simplify the retirement income pursuit…and we are here to help!

Want to learn more? Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

Risk Literacy and Why Your Committee Should Consider It

By Mark Olsen, Managing Director at PlanPILOT

This article offers insight into the complex topic of the various risks defined contribution (DC) participants face. It also challenges traditional thinking about risk, which often oversimplifies risk as a single category and underestimates the impact various risks have on retirement outcomes.  We believe plan sponsors would do well to deploy time toward “risk literacy” and understand the various risks their participants face as they make critical plan oversight decisions. Risk literacy will help committees prioritize the way they spend time and inform key decision-making.

Risks Defined

Risk comes in many forms that sponsors have to take into consideration for participants in plan oversight—market volatility, downside risk, shortfall risk in retirement, inflation risk, interest rate risk, and participant behavioral risk, to name the primary risk factors. 

Traditionally, the most common form of risk that committees focus on is volatility, which captures the ups and downs of market events relative to a benchmark. While volatility risk is an important risk, it is not the only risk. In fact, consider that upside really is not a risk; it is a reward. Solely focusing on this single risk factor will unfortunately overlook other critical risks that have a material impact on key decisions and retirement outcomes. As a start, below is a summary of the primary risks DC plan participants face.

  • Volatility risk: The risk of a change in market value of a portfolio (up and down) as a result of changes in the volatility of a risk factor
  • Downside risk: An estimation of a portfolio’s potential loss in value if market conditions precipitate a decline in that portfolio’s value
  • Shortfall risk: Probability that a portfolio falls below some specified threshold level (e.g., a shortfall in retirement)
  • Inflation risk: The risk that purchasing power will be reduced if the value of your investments does not keep pace with inflation
  • Interest rate risk: The risk that changes in interest rates may reduce (or increase) the market value of a fixed income asset
  • Participant behavioral risk: The risk that participants will make decisions at inopportune times (e.g., selling when the market drops, buying when the market is at a high, not saving enough, borrowing from their DC account, investing misaligned to long-term goals—100% in a risk asset or asset that is too conservative)

Impact on DC Plans

The way these various risks impact investments, savings, and ultimately retirement outcomes in DC plans varies considerably. Plan sponsors who take the time to understand each risk and the impact on the choices they make on behalf of participants will be in a position to establish a hierarchy of risk prioritization to guide their work, leading to more informed decision-making. In the open, we acknowledge that the topic of risk in DC plans is highly complex. Our objective is to identify key risks at a high level and offer considerations for committees as they navigate plan decisions. We have provided a list of considerations below. By no means is this list intended to be fully comprehensive. Rather, we hope to instigate deeper thinking about risk and expand the conversation over time.

Key Committee Considerations

  • How does each risk impact the QDIA (Qualified Default Investment Alternative) of your plan? Ask your consultant/advisor for a thorough review and analysis of the impact each risk has on your QDIA and consider this compared to plan objectives.
  • Has your committee historically focused only on benchmark relative returns when assessing options (particularly for the QDIA)? Ask your consultant/advisor to expand the discussion from the perspective of downside risk/deviation and short-fall risk for a more well-rounded perspective.
  • How will our bond offerings hold up in a rising interest rate environment? Should you consider increasing diversification or other offerings? Ask your consultant/advisor for a review of your bond options.
  • Does your lineup adequately address inflation risk? What are alternatives to consider to tackle the issue? Ask your consultant/advisor for an inflation education session complete with various opportunities for evaluation and consideration.
  • Have you studied the pattern of participant behavior (deferral rates, borrowing, trading activity, investments, etc.)? Consider a deep review of these patterns and establish a communication and engagement strategy to combat areas of concern, as well as encourage better decisions.

We’re Here to Help

We hope this article has prompted the beginning of deeper thinking about the topic of risks connected to DC plan oversight. In our view, this is particularly important in a market environment that is unpredictable and at the precipice of arguably laying out all risks at once for sponsors to navigate. Today’s market environment means it is more important than ever to expand thinking about risk and be very clear about the way all risks impact committee decisions and, most importantly, participant retirement portfolios. 

Want to learn more? Reach out to us today by calling us at (312) 973-4913 or emailing mark.olsen@PlanPILOT.com

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k) and 403(b) plan sponsors. Drawing on more than two decades of experience, Mark provides institutional retirement plan consulting to 401(k), 403(b), and defined benefit plans. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

Keeping Retiree Assets in Plan. Has Your Committee Established a Preference?

By Mark Olsen, Managing Director at PlanPILOT

This article offers insight into a growing area of focus for plan sponsors, which is whether or not retaining participant assets in the defined contribution (DC) plan at retirement is a priority. As DC plans have grown into their role as the primary retirement vehicle for most plan participants, it begs the question: What does that mean for the destination of retiree assets?