Do You Know What Kind of QDIA Your Plan Has?

Comparing Target-date Funds (TDFs) and Balanced Funds as a QDIA

So many acronyms! But they represent very important considerations for you as a 401(k) or 403(b) plan sponsor. So first, what are they?

QDIA stands for Qualified Default Investment Alternative. It is the default investment used when an employee contributes to the plan without choosing a specific investment option.

A Target-date fund (TDF) is often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date approaches.

A balanced fund is a mutual fund that typically contains a pre-determined, fixed allocation percentage of stocks, bonds, and cash. Typically, a QDIA balanced fund has an allocation of approximately 60% stocks and 40% bonds. It is a type of fund known as a target-risk fund, (TRF), because one can determine the fund risk level by its allocation between stocks, bonds, and cash. TRFs can range from a conservative allocation to an aggressive allocation such as 100% stocks.

A recent article in PLANADVISER.com by Beth Braverman discusses the differences between the two types of funds. Following are a few excerpts and the full article can be found below.

• Both TDFs and balanced funds are used as QDIAs in retirement plans. Their growth has been huge, with each type holding more than a trillion dollars in assets. Since a large percentage of invested funds in most plans end up in a plan’s QDIA, making a choice appropriate for each retirement plan is of great significance.
  
• Much of the growth of target-date funds and their popularity is due to their ease of use for both investors and plan sponsors.
  
• Growth of TDFs has exceeded that of balanced funds because of “perceived advantages of target-date funds.” TDFs are known as the go-to “set it and forget it” investment alternative because their allocation is automatically adjusted as the investor’s age increases. Since balanced funds have a set allocation, they do not adjust automatically.
  
• Choosing a QDIA type is an important decision, and it is “of paramount importance to monitor the results of this decision.” This monitoring of TDF performance is complicated and often prevents adequate scrutiny. To gain performance, some TDFs often take on more risk than uninformed investors expect.
  
• Monitoring TDFs can be complicated. Plan sponsors are required to know the fund manager’s philosophy about glide path, whether it is an active, passive, or blended fund, whether it is a “to” or “through” fund, and what its relative fee levels are. Generally, the more complicated and actively managed, the higher the fees. And monitoring actual TDF investment performance can be a challenge because they are “notoriously difficult to benchmark.”
  
• It is therefore important to find a comparable benchmark set and use it in performance reviews consistently.
  
• Balanced funds, and target-risk funds in general, are far less complicated than TDFs and are therefore less prone to investor-misunderstood risk levels and are simpler in terms of measuring fund performance against well-established benchmarks. They therefore can carry less fiduciary risk for the plan sponsors than TDFs.

Curious about your QDIA? We'd love to help you evaluate if you've got the best one for your plan participants. Please reach out to connect with us at info@investorsassetmanagement.com