Professional Investment Management

Outsource account management

As we mentioned in our previous blog about qualified default investment alternatives (QDIAs), investing can seem complicated to employees. Many individuals struggle with investment concepts such as diversification, asset allocation, and rebalancing. They can also be overwhelmed by the responsibility of selecting and monitoring their investments.

As such, the traditional approach of providing educational materials detailing every aspect of investing in a retirement plan can be ineffective. Instead, many of your clients’ employees simply want someone or something to do the work for them.

This has resulted in the development of “do-it-for-me” solutions that shift or outsource that responsibility to another party. These solutions include risk-based (or lifestyle) investments, target-date (or lifecycle) funds, and managed accounts.

Risk-based investments can place an individual’s contributions in a mix of funds based on personal risk tolerance—the greater the risk tolerance, the more aggressive the investment strategy.

Target-date investments can place an individual’s contributions in a mix of funds based on the amount of time until retirement—the closer to retirement, the more conservative the investment strategy.

If market activity impacts the investment strategy, both types of investments will automatically rebalance the individual’s account to return it to the intended mix.

Risk-based and target-date investments have become especially popular as QDIA selections in defined contribution plans with automatic enrollment. According to Cerulli Associates, target-date funds are used as the QDIA in these plans 69.8% of the time, while risk-based funds are used 10.6% of the time.¹

Typically, there is no additional cost to your clients or their employees for risk-based or target-date options.

Managed accounts provide another alternative for the hands-off investor. Individuals can choose to pay a fee to have a professional money manager step in to analyze their personal profile. The manager then uses this information to select appropriate investments, make savings rate recommendations, allocate assets, and provide ongoing account oversight and maintenance.

Managed money solutions are garnering more and more attention among fee-based advisors. According to a Cogent Reports study from Market Strategies International, 76% of fee-based advisors now use a managed account solution. This accounts for 61% of their total assets under management, on average.²

Offering your clients and their employees access to managed accounts allows for the greatest level of customization and personal attention. In addition, the money manager will also act as a 3(38) fiduciary, taking on fiduciary status with respect to the employee. This approach satisfies the needs of a plan’s “do-it-for-me” investors without interfering with the preferences of “do-it-myself” investors.

When your clients mention “do-it-for-me” investors in their plans, talk to them about how their employees might benefit from professional investment management. Risk-based investments, target-date funds, and managed accounts can be extremely useful to participants who have neither the time nor the desire to become investment experts.

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1 Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.
2 Source: Advisor Trends in Managed Accounts™, quoted in Fallon, Anne. "Cogent Reports: Managed Account Use Expected to Grow Three Times Faster for ETFs than Mutual Funds." Market Strategies International, November 14, 2013. http://www.marketstrategies.com/news/2291/1/Cogent-Reports--Managed-Account-Use-Expected-to-Grow-Three-Times-Faster-for-ETFs-than-Mutual-Funds.aspx. 

QDIAs

Make investing easier with a default option for growth

Retirement plan participants sometimes struggle with figuring out how to invest their contributions. Perhaps that is why recent trends have seen many individuals forgo making these decisions themselves, opting instead to use professionally managed investment options.

According to data published by Vanguard, 36% of all Vanguard participants had their entire account balance invested in a single target-date fund, a single target-risk or traditional balanced fund, or a managed account advisory service in 2012 (compared with just 17% in 2007). The company believes that the growing popularity of these options demonstrates “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”¹

To make investing easier for participants, all of the investment options mentioned above can be used as qualified default investment alternatives (QDIAs) within a retirement plan.

A QDIA is an investment fund that can keep your client’s plan running smoothly if employees enroll but don't provide investment direction for their assets. Contributions are automatically invested in this fund unless employees make an alternative investment election.

The following investment types have been approved by the Department of Labor as acceptable default investments that may meet QDIA requirements:

• Balanced Funds – designed to meet the needs of participants with a balanced mix of stocks and bonds
• Lifecycle Funds – designed to meet participant needs based on participant age, a target retirement date, or life expectancy
• Managed Accounts – accounts managed by an asset allocation service
  
  

It used to be that the default investment option for employees enrolled in their company’s retirement plan generally focused solely on capital preservation. Unlike “cash equivalent” savings instruments like money market funds that struggle to keep pace with inflation, QDIAs are growth- and diversification-oriented investment alternatives that today’s employers can put in place for employees who don’t feel comfortable allocating assets on their own. Knowing that their money will be invested in a diversified, professionally managed fund can help them feel better about their contributions.

A QDIA can be especially helpful for employees who have been automatically enrolled in a retirement plan, as it provides an instant, disciplined investment program. PLANSPONSOR’s 2012 Defined Contribution Survey revealed that 82% of plan sponsors use a QDIA as the default investment for participants who are automatically enrolled in their defined contribution plan.²

Despite this number, there are still opportunities to make plan sponsors aware of how a QDIA can encourage better long-term savings rates for participants while providing fiduciary protection for employers. “I am still surprised by how many plan sponsors are unaware of these protections,” says Kathleen Connelly, executive vice president of Client Service at Ascensus. “The amount of education that a plan sponsor has on this subject definitely influences its decision on whether or not to use a QDIA with its plan.”³

You can help your clients understand how a QDIA can work for them by presenting it as a win-win situation. For example, by selecting a QDIA as the default investment for their plan, they not only help their employees invest for retirement, but they are also relieved of fiduciary liability related to the fund's performance. Further QDIA benefits are listed in the table below.

QDIA Benefits

Employer	Participant
Easy to implement	Provides a simple way to start saving
Simplifies plan management	Ensures that assets are invested in a qualified fund
Includes fiduciary protection	Provides automatic diversification and a better risk-reward balance

A QDIA may be the answer for clients looking to help employees get invested, whether they are automatically enrolled in a plan or if they feel that they aren’t knowledgeable enough to pick funds from a plan lineup. Talk to your clients about how these funds give employees a default investment option to start and grow their retirement savings.

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1 Source: Vanguard, "How America Saves 2013: A report on Vanguard 2012 defined contribution plan data." June 2013. https://pressroom.vanguard.com/nonindexed/2013.06.03_How_America_Saves_2013.pdf.
2 Source: PLANSPONSOR 2012 Defined Contribution Survey, quoted in Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057.
3 Source: Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057. 

Asset Allocation Models, Target-Date Funds, and Automatic Rebalancing

Make diversifying and rebalancing accounts easier for employees

Historically, employees who didn't have the experience to make informed investment decisions were overwhelmed and intimidated by the prospect of manually diversifying and rebalancing their accounts.

With today’s retirement plans, you can provide your clients with access to asset allocation models, target-date funds, and automatic rebalancing so that their employees can easily manage their savings based on their personal risk preferences and goals.

Asset Allocation Models

Asset allocation models are built with a mix of investments across different asset classes. These models are created with specific investor profiles (e.g., conservative, moderate, aggressive, etc.) in mind to help align with particular objectives and risk tolerance.

When participants choose an asset allocation model that fits their personal savings goals, smart investing becomes quick and easy. Rather than selecting a number of individual investments, they can choose one of several portfolio models based on their age or risk tolerance.

In addition to reducing the number of choices that participants have to make, these models foster a disciplined approach to investing through built-in benefits such as proper diversification and rebalancing. Perhaps most importantly, they can help participants stay invested through extreme changes in the market. At Ascensus, we tracked plan participants who were invested in asset allocation models from the beginning of 2009 and through the end of 2011. In arguably one of the most volatile market periods ever, over 98% of those participants remained invested in asset allocation models.¹

Target-Date Funds
Like asset allocation models, target-date funds allow employees to choose a single, diversified investment option. However, the asset mix is adjusted toward more conservative allocations based on a specified target date.

The ease with which a target-date strategy can be implemented makes it a popular choice in retirement plans. According to Morningstar’s 2013 Target-Date Series Research Paper, target-date funds saw almost $55 billion in net new flows in 2012, bringing their total to nearly $485 billion. In the first quarter of 2013, target-date assets crossed the $500 billion threshold after taking in an additional $23 billion in new assets.²

Automatic Rebalancing
One of the most attractive features of asset allocation models and target-date funds is automatic rebalancing, which mitigates the redistribution of employees’ assets due to an up or down market. This can help make sure that employees’ investment strategies stay appropriate for their current goals, risk tolerance, and circumstances. Target-date funds are rebalanced on a schedule determined by their portfolio managers, while the employer selects the frequency (quarterly, semi-annually, or annually) with which asset allocation models are automatically rebalanced.

Automatic rebalancing may also be offered to employees as a standalone option outside of target-date funds and asset allocation models. This allows them to automatically have their account balances redistributed at a schedule they choose according to their investment elections at the time of rebalancing.

Research has shown that the portfolio rebalancing system is an effective way to help ensure that employees stay on track with their retirement saving strategy. Forbes compared two portfolios each starting with a $10,000 investment beginning in 1985 and ending in 2010. Both portfolios began with a 60/40 mix of stocks and bonds; one was never rebalanced, while the other was rebalanced annually back to its original target. At the end of the 25-year period, the rebalanced portfolio ended with a higher balance ($97,000) than the un-rebalanced portfolio ($89,000).³

Concepts like diversification and rebalancing can be overwhelming for employees participating in your clients’ retirement plans. Providing access to asset allocation models, target-date funds, and automatic rebalancing allows your clients to simplify those concepts so they can help their employees move closer to achieving their retirement goals.

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1 Source: Ascensus data, December 2013.

2 Source: Morningstar Fund Research, "Target-Date Series Research Paper 2013 Survey." June 2013. http://corporate.morningstar.com/us/documents/ResearchPapers/2013TargetDate.pdf.

3 Source: Brown, Janet. Forbes, "Does Portfolio Balancing Work?" November 16, 2011. http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/.