What’s a common dynamic QDIA design and what’s it meant to do?
One popular dynamic QDIA model defaults new plan participants under age 40 in a suitable target-date fund (TDF), then moves them to a managed account when they reach that target age. Employees who are 40 or older when they enter the plan are defaulted directly into the managed account.
The main goal of this design is to meet participants where they are—that is, to offer them an investment strategy that’s suitable for their current phase of retirement planning. This dynamic QDIA strategy attempts to do this by:
- Applying the broadly accepted target-date glide path in the earlier accumulation years, when the goal is to try to optimize saving and investing for the long term, and
- Taking a more personalized approach as people get closer to retirement, when their unique financial situation may have a more profound effect on their ability to achieve retirement readiness.
Managed accounts can help address changing participant needs
By the time participants reach age 40, even if they’ve been saving for retirement, their overall financial situation is likely more complex than when they started out. They often have debt to deal with, as well as cash on hand that they need to save and invest effectively. What’s more, they can be still be raising a family, helping to pay their kids’ education expenses, or caring for older parents.
As a result of this increased complexity, plan participants may benefit more from personalized advice as they age. The trend in financial professional usage seems to reinforce this idea.
Older participants are more likely to work with a financial professional
Retirement plan participants wiith financial professional relationships by age group (%)
SOURCE: John Hancock’s 2023 financial stress survey. In December 2022, John Hancock commissioned our ninth annual stress, finances, and well-being survey with the respected research firm Edelman Public Relations Worldwide Canada Inc. (Edelman). An online survey of 3,825 workers was conducted between 11/29/22 and 12/14/22 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other.
Another way older participants differ from younger ones is in their projected ability to replace 70% or more of their earnings in retirement, our benchmark for retirement readiness. There are several possible reasons for this.
Some simply may not have enough put away for retirement—and they could certainly benefit from professional advice. Others, especially those with higher income, may have outside assets in IRAs, former employers’ plans, or brokerage accounts that aren’t showing up in their current plan’s readiness calculations. And since keeping track of multiple accounts can itself be a complicating factor, these participants, too, may benefit from the help of a professional advisor.
The net result—an approach that gets more personal over time
As people approach their target retirement date, they may need a more personalized investment and saving approach. And while a TDF helps a younger investor navigate toward an approximate retirement year, a managed account can proactively incorporate other important data points, including:
- Account balance
- Age and actual expected retirement date
- Assets held in other plans
- Risk tolerance
Together, these factors can move a participant’s recommended investment mix off the strictly age-based glide path by which TDFs are managed. (But note that managed accounts may not follow these parameters if it’s in the best interest of an investor.)
At the same time, managed accounts may provide a stepped-up investor experience, which could include features like:
- Retirement income projections
- Drawdown guidance
- Account rebalancing
- Independent advice—to steer the portfolio in the long term and to supply counseling and adjustments when a participant’s needs change
The comprehensive, personalized advice available with a managed account can be valuable at any age. And it may be suitable for people who want a less complicated shift into retirement, especially if they’re less confident or skilled in investing, which is the population a QDIA is meant to benefit.
Is a dynamic QDIA suitable for your plan? Weigh the value
Since TDFs are generally a fixture in defined contribution plans, the main consideration for most sponsors may be the cost of the managed account.
Managed account portfolios are built from the plan’s existing investment options, so the same plan-wide investment costs also apply. The managed account service does come with an added participant fee. Is it worth it?
As with many other aspects of the plan, the answer ultimately lies in your participant data. Is a significant amount of your workforce at or approaching mid-career? Does retirement readiness become more of an issue as participants age?
These could be signs that a dynamic QDIA may be worth considering.
1 "PLANSPONSOR 2023 Defined Contribution Plan Industry Reports," Asset International, Inc. 2022.
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A target-date portfolio is an investment option comprising a fund of funds that allocates its investments among multiple asset classes that can include U.S. and foreign equity and fixed-income securities. The target date is the approximate date an investor plans to start withdrawing money. The portfolio’s ability to achieve its investment objective will depend largely on the ability of the subadvisor to select the appropriate mix of underlying funds and on the underlying funds’ ability to meet their investment objectives. The portfolio managers control security selection and asset allocation. There can be no assurance that either a fund or the underlying funds will achieve their investment objectives. Investors should examine the asset allocation of the fund to ensure it is consistent with their own risk tolerance. A fund is subject to the same risks as the underlying funds in which it invests. Because target-date funds are managed to specific retirement dates, investors may be taking on greater risk if the actual year of retirement differs dramatically from the original estimated date. Target-date funds generally shift to a more conservative investment mix over time. While this may help manage risk, it does not guarantee earnings growth. An investment in a target-date fund is not guaranteed, and you may experience losses, including principal value, at, or after, the target date. There is no guarantee that the fund will provide adequate income at and through retirement. Consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. For a more complete description of these and other risks, please see the fund’s prospectus.
The glide path is the asset allocation within a target-date strategy that adjusts over time as participants’ age increases and their time horizon to retirement shortens. The basis of the glide path is to reduce the portfolio’s chance of loss as the participants’ time horizon decreases. The asset mix of each portfolio is based on a target date, which is the expected year in which participants in a portfolio plan to retire and no longer make contributions. A team of asset allocation professionals adjusts each portfolio’s investments over time to ensure a noticeable and steady shift from equities to fixed income in the years leading to retirement or during retirement, if applicable. Investors should examine the asset allocation of the portfolio to ensure it is consistent with their own risk tolerance. In developing the glide path, it was assumed that participants would make ongoing contributions during the years leading up to retirement and stop making those contributions when the target date is reached. The principal value of your investment, as well as your potential rate of return, is not guaranteed at any time, including at, or after, the target retirement date.
Subject to plan availability. Participation in John Hancock Personalized Retirement Advice (Retirement Advice) does not guarantee investment success. Investing involves risks, including the potential loss of principal. Fees for this service are based on a tiered schedule and vary by account balance. For more information, consult the Retirement Advice investment advisory agreement. John Hancock Personal Financial Services, LLC (JHPFS), an SEC registered investment adviser and affiliate of John Hancock Retirement Plan Services LLC (JHRPS), is the investment manager of the Retirement Advice program. JHPFS has selected Morningstar Investment Management LLC, a registered investment adviser and wholly owned subsidiary of Morningstar, Inc., to act as the independent financial expert (as defined in the U.S. Department of Labor’s Advisory Opinion 2001-09A) for Retirement Advice. JHPFS monitors Morningstar Investment Management’s performance. Morningstar Investment Management LLC is not affiliated with JHRPS, JHPFS, or affiliates. JHPFS acts as a fiduciary with respect to the management of Retirement Advice investments.
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