401k Investment Default Options for Employees by Fred Barstein
401k Investment Default Options for your Employees are arguably the most important investment decision a 401k or 403b plan can make as the default option or QDIA – Qualified Default Investment Alternative. The advent of auto-enrollment results in most participants defaulting into their employer’s QDIA, where a significant percentage of new contributions flow into this investment.
Nuveen recently published a QDIA checklist and evaluator in their inaugural magazine, “next: The Future of Defined Contribution”, providing helpful guidance for defined contribution plan sponsors.
The first step is for plan sponsors, with the help of their advisor, to review their employee demographics and profile including:
– Average age
– Average salary
– Risk profile
– Access to a pension plan
– Expected retirement age
– Tenure and turnover
– Average account balances
Most of this data is available to the plan sponsor and their record keeper but averages can sometimes be misleading. It is best to look at the percentages, employee by age within five-year increments since this is how target date funds are designed. Getting risk profile information can be challenging as well. Brendan McCarthy, Nuveen’s DCIO National Sales Manager, suggested employee surveys or a candid assessment by the plan sponsors, CFO and HR managers. Finally, if possible, gaining insight into employees’ outside assets is helpful with data becoming more readily available.
Though a growing number of DC plans are using target-date funds because of their simplicity, McCarthy warns that not all glide paths are created equal. Plan sponsors need to make certain that the participants understand the glide path or risk within a target date portfolio and then compare it with the profile and demographics of the employees.
There are tools that can help plan sponsors compare and contrast various target date options which also assess whether the fund is “to retirement” or “through retirement” – meaning does the fund become more conservative at retirement age or does it continue to take risk through retirement.
And then, of course, the plan sponsor must decide which target-date fund meets their profile in addition to assessing their relative performance and fees through a documented due diligence process which isn’t necessarily different than evaluating other types of investments. The Department of Labor was clear in their 2013 “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries” that simply selecting their record keeper’s proprietary or default option is not a prudent practice.