Blog

By Mark Olsen, Managing Director at PlanPILOT

When it comes to investing, the term diversification is often thrown around—often along with the age-old phrase “Don’t put all your eggs in one basket.” But what does it mean to diversify, and how can you make sure your portfolio is diverse?

Even if your understanding of diversification is already solid, to better understand how you can reduce volatility in an uncertain market, it’s helpful to review its benefits.

Minimize Risk

One primary role of diversification is to minimize risk in the stock market. This doesn’t just mean diversifying between growth stocks and value stocks. True diversification requires incorporating a mix of different types of investments—think stocks, bonds, international investments, real estate, etc.

There are varying factors that govern the amount of risk you’re willing to accept. If you are banking on your money being there for you on a certain date, it may align better with your financial plan to utilize a more conservative mix of investment assets with a history of lower volatility. Having a portfolio that is diversified with lower risk will give you peace of mind.

As we mix and match asset classes and strategies, risk-capacity decisions need to be made no matter the timeline length. By optimizing the way your portfolio is constructed, we can help minimize risk and maximize returns.

Increase Your Potential for Added Gains

Since its inception in 1926, the average return from the S&P 500 has been 10-11%. Learning a bit of stock market history often puts many at ease when deciding to move money from a savings account into the stock market.

Downturns and recessions are certain realities during one’s lifetime, but those are the same reasons why many wealth managers suggest taking a long-term view on investing. Simply keeping your money in the stock market versus quickly buying and selling is a risk-mitigation strategy of its own.

These downturns also pose new opportunities. Take the global pandemic, for example: 2020 created a unique window of opportunity. Certain high-growth investments performed exceptionally well as the economy reacted to COVID-19, while the brief drop in the market made some value investments available at deeply discounted prices. 2020 provides an example of how investments respond differently to economy-wide shifts, which underscores the importance of diversification as a hedge against both short and long-term losses.

Because of the unpredictability associated with short-term stock market success, diversification and investing according to when you need the money can help you reach your goal with more confidence when compared to putting all your eggs into one basket. 

The Ideal Mix

Perfection is notoriously unattainable, so calling an investment mix “ideal” can feel like a loaded term. Everyone has their own unique goals, dreams, timelines, and risk capacity—what’s ideal for one may not be ideal for another. In general, the closer you are to retirement, the more conservative investment mix you might hold. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve. 

Ready for the Next Step? 

As with anything related to your hard-earned wealth, when it comes to investment decisions, it’s wise to meet with a financial professional—someone who can learn about your personal circumstances and tailor their advice to your specific financial goals. 

At PlanPILOT, we are committed to guiding you toward success so you can feel confident in your financial future. If you’re looking to partner with an experienced advisor you can trust to put you first, set up a get-acquainted meeting to see if we’re a good fit. 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.

By Nate Cassel, Senior Consultant at PlanPILOT

Managing an employer-sponsored retirement plan can be challenging, especially if it’s a plan that has experienced significant participant growth without the administrative infrastructure to support it. As the plan grows, the management should adapt and grow with it. Unfortunately, for many employers, that’s not always the case. That’s where PlanPILOT comes in. 

We can help plan sponsors simplify the implementation and management of their plans, freeing up time and energy for other important projects. But don’t just take our word for it. Here’s one example of how we helped a recent client streamline their employer-sponsored retirement plan. 

The Client

In this case, our client was a large Texas community college that had seen tremendous growth in recent years. Their part-time employee population had grown exponentially by the time we started working with them, but their retirement plan for part-timers had not been evaluated since it was first established in the early 1990s. 

The Goal

Since this part-time retirement plan is a mandatory contribution plan that replaces Social Security for these employees, it is crucial that it is:

• Easy to administer
• Understandable and “automatic”
• Streamlined to cash out all permitted balances automatically

This was not the case when PlanPILOT was hired. The client had one person dedicated to taking care of almost 10,000 participant accounts, answering questions from confused employees, verifying paper forms for distributions, and fixing employee account issues. 

There was a lot of inefficiency with how the plan was being managed on a day-to-day basis. PlanPILOT was hired to help alleviate this issue.

The Outcome

As part of our process, we led the client through a complete and comprehensive Request for Proposal so they could evaluate their options for a new recordkeeper and third-party plan administrator. Our vetting and facilitation of this process allowed the client to:

• Select a fully automated solution with a national recordkeeper that has extensive experience working with their type of plan.
• Cash out nearly 2,000 small balances, reducing plan liability and future administrative burden.
• Outsource virtually all customer service questions to the recordkeeper, allowing the internal dedicated employee to transition to other needed projects.
• Improve the investment options available within the plan and adopt a best-in-class, comprehensive mutual fund line-up with quarterly fiduciary monitoring.

Working with PlanPILOT was an instrumental part in streamlining the recordkeeping, administration and management of this client’s part-time retirement plan. 

Do You Need Help Streamlining Your Retirement Plan?

If you are a plan sponsor experiencing a similar issue, or if you would like a second set of eyes on your current plan’s management, please reach out to us! At PlanPILOT, we have the tools and expertise to help plan sponsors update their plans to keep up with the evolving needs of employees and federal regulations. To learn more about our process, call us at (312) 809-3603 or email nate.cassel@PlanPILOT.com..

About Nate

Nate Cassel is a Senior Consultant 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, plan design, product evolution, and plan oversight. Nate has over thirty years of experience in the retirement plan arena helping plan sponsors provide better plan outcomes for their employees while lowering institutional risk.

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.