At PNC, for clients with significant percentages of their population not actively engaged with the defined contribution retirement plan, we typically recommend the use of target date funds (TDFs) as the plan’s Qualified Default Investment Alternative (QDIA). We believe managed accounts may be better suited as an opt-in feature for participants who are willing to engage, provide information and use the service intentionally.[1]

The reason is straightforward: a QDIA is intended to serve participants who do not make an affirmative investment election. Target date funds are suited for that default environment because they offer a diversified, age-based allocation that automatically adjusts over time and framework that allows participants to be placed in the appropriate series based solely on age and assumed retirement year. The U.S. Department of Labor notes that TDFs are commonly used as QDIAs and emphasizes the importance of understanding and monitoring the glide path, investments, fees and participant fit.[2]

On the other hand, managed accounts can add value for participants who supply the information needed to personalize their allocation (e.g., other assets, pensions, Social Security, spouse’s assets, health, planned retirement age, spending needs, risk tolerance, etc.) and remain engaged with the manager over time. Without that data and engagement, the managed account service is forced to rely on basic participant information that may result in a generic investment strategy that does not ultimately add value for the participant, especially when the drag of managed account program fees on top of underlying fund expenses is factored in.

Managed accounts can still play a useful role in the plan as an opt-in feature for savers wanting more individualized support who are willing to provide the information necessary for the service to work as intended.

PNC perspective:  Align the default with participant engagement

In simple terms, when participant engagement is limited, managed accounts may leave their personalization value unrealized.

  • We believe TDFs are generally more aligned with the logic of a default investment for a disengaged participant population because they do not require participant input to deliver a diversified, age-based allocation.
  • Managed accounts can add value for participants who affirmatively choose the service and are willing to engage with the program and provide the data needed for personalization.
  • The specific risks and benefits of any investment option in either category must be evaluated by plan fiduciaries.

The fiduciary focus should center on purpose and participant behavior

Many defined contribution plan committees may frame the choice between target date funds and managed accounts as a choice between a standard investment solution and a more personalized one. We believe that comparison is incomplete. The more important fiduciary question is whether the solution fits the behavior of the participants it is designed to serve.

A QDIA serves participants who make no affirmative investment election. In that context, the default investment should be one that can work without requiring participant engagement, additional data entry or periodic participant action. For this reason, we typically favor TDFs over managed accounts as the appropriate QDIA for most plans.

TDFs are designed to provide a diversified, age-based investment path that adjusts with time. Typically, as an individual approaches retirement, the TDF reduces equity exposure along a glidepath in keeping with a homogenized, age-appropriate asset allocation. It is important to note that while TDFs can provide a convenient, diversified investment approach, their glidepaths, underlying investments, risk levels and fees can vary significantly. These differences reinforce the importance of a prudent fiduciary process for selecting, monitoring and documenting the plan’s TDF offering.

The potential added value of a managed account largely is tied to personalization. That personalization may be meaningful for participants providing information about their circumstances, savings behavior, outside assets, retirement goals or risk tolerance. But if participants do not engage, the managed account could have limited information on which to improve meaningfully on a basic age-based default.

Where managed accounts can add value for participants

While managed accounts may not be the preferred option for the QDIA for many plans, we are not saying they have no place in retirement plans. We believe, as an opt-in feature, managed accounts have the potential to offer meaningful personalization for participants whose characteristics differ from those of the broader population in their age group. For example, a participant who is 45 years old and has no savings is likely to need a greater equity allocation than a similarly aged participant with “average savings.”

With that said, even as an opt-in feature, committees still need to evaluate managed accounts as a plan feature. The review should focus on whether the service is useful, understandable, reasonably priced and appropriately positioned as an opt-in. Considerations may include:

  • What data is required for the managed account to provide meaningful personalization?
  • Which data points are supplied automatically by the employer and which require participant input?
  • How does the manager allocate accounts when participant data is missing, incomplete or stale?
  • How often are participant assumptions refreshed?
  • What fees are charged and are those fees reasonable relative to the service delivered?
  • How will participants understand what the managed account does and does not do?
  • How will the committee monitor usage, engagement and value over time?

Comparing TDFs and managed accounts

Evaluation Criteria / Committee Question

 

Consideration

Default Investment Role: Which solution is better suited to serve participants who do not make an investment election?

 

For many plans, TDFs are better aligned with the QDIA role because they can operate without any participant action; managed accounts may be better positioned as an opt-in service for participants who are willing to engage to obtain the benefits of personalization.

Participant Engagement: How much participant input is required?

 

TDFs can function without participant inputs beyond age or target retirement date. Managed accounts generally depend on added participant data to create incremental value.

Incomplete or Outdated Data: How does the solution operate when participant data is insufficient?

 

The plan fiduciary should ask the manager whether participants with missing data may be placed into a generic moderate or conservative managed account profile that is less aligned than an age-based TDF glide path.

Fees vs Value: Are fees reasonable relative to the services participants actually use?

 

Additional costs should be evaluated against the value delivered, particularly in cases where participants do not provide data.

Participant Communications: Do participants clearly understand when a managed account may be useful and what information they need to provide?

Communications should make clear that managed accounts rely on complete and current participant information to deliver more personalized guidance.

Ongoing Monitoring: What metrics will the committee use to evaluate fit, engagement, fees and outcomes over time?

 

Monitor TDF fit and glide path; monitor managed account opt-in rates, data completion, fees, performance and participant usage.

Key considerations for plan fiduciaries

Managed accounts and TDFs can both have a place in a defined contribution plan, with each serving a distinct participant need. We believe TDFs are typically better suited for the default environment especially for plans with larger numbers of participants being defaulted into the QDIA, while managed accounts may add more value for participants who choose a more personalized investment experience.

At PNC, we believe plan fiduciaries should evaluate each plan investment option based on its intended role, participant use, cost and alignment with plan objectives. That framework is particularly important when selecting a QDIA to help ensure plan participants are ultimately prepared for retirement.