401(k) Specialist Issue 2 - 2024 - 44

401(k) END NOTES
The Right Way to Select a QDIA
By Richard Weiss
FULLY DOCUMENTING THE process of analyzing
and selecting a strategy that aligns with
participant demographics provides the highest
level of legal protection for your QDIA selection
Let's begin with a simple QDIA multiple-choice
quiz.
As a plan fiduciary, you are most at risk of
legal action if your QDIA:
A. Ranks poorly in return comparisons over
the last few years
B. Has higher than average fees; or
C. Doesn't align with participant
demographics
If you chose " C " as the correct answer, then
well done! You don't have to read any further.
Unfortunately, many plan sponsors, abetted by
their consultants and advisors, still act as if the
first two choices are paramount despite Department
of Labor (DOL) guidance on this topic. So,
if you find yourself thinking that fees or returns
are your biggest legal risk, then you owe it to
yourself and your participants to read on.
The process of identifying an appropriately
qualified default investment alternative (QDIA)
for your plan has certainly evolved over the
years. We've come a long way from the days of
money market funds or company stock as the
mainstay in defined contribution (DC) plans.
Overly conservative or highly concentrated,
risky investments aren't considered appropriate
investments for a defaulted DC plan
participant.
Modern portfolio theory* and the concept of
diversification have rightly led us to a variety of
investment strategies that offer more prudent
paths to a successful retirement outcome.
Chief among these vehicles are target-date
funds (TDFs). TDFs are professionally managed,
diversified strategies that adjust the asset
allocation and risk posture of the portfolio
as the participant nears the retirement " target
date. " These vehicles are now the dominant
QDIA with over $3 trillion** in assets under
management across the industry.
All TDFs seek to do one thing: Minimize
longevity risk (the risk of outliving one's
wealth). But the risk of running out of money
44
ISSUE 2 2024 | 401kSpecialist.com
in retirement isn't an easy problem to solve,
even for a single individual. In fact, it's a
complex mathematical/financial problem
with no single optimal solution. The degree of
difficulty increases further when we try to solve
this calculus across all members of a DC plan.
Reflecting this reality, there are many valid approaches
to target-date design. No one option
or approach can lay claim to being the " best. "
Like a Good Suit, a QDIA Should Fit
the Individual Plan
A target-date strategy is akin to a suit of
clothing. There is no one objectively " best "
suit. " Best " or " worst " is defined by how it fits
the wearer. In other words, the most appropriate
target-date strategy isn't necessarily the
most (or least) expensive or the most daring-
it's the one that best " suits " the plan sponsor's
objectives and the needs of the participant
population.
Pushing the " easy button " by selecting the
strategy with the highest historical returns
or the lowest fees as your plan's QDIA won't
necessarily prove adherence to the fiduciary's
duty of loyalty and prudence.
The importance of fit was brought to bear in
recent litigation alleging mismanagement of
TDF selection. U.S. District Court Judge James
Selna found, " An important criterion in selecting
a TDF for a defined contribution plan is
attempting to match a TDF to the participants'
risk profiles and adopting an appropriate philosophy
for evaluating the given risk profile. "
You should consider the many readily available
plan metrics (or measurements in our
suit of clothing analogy) before selecting the
appropriate target-date strategy; that is, the
one that fits your unique plan the best.
Fully documenting the process by which
you analyzed and selected a strategy that
aligns with participant demographics provides
the highest level of legal protection for your
QDIA selection. Suggested data to review
include age cohorts, salary levels, account balances,
deferral rates and matching programs,
employee turnover rate and average tenure,
retirement income objectives, availability of
other savings (e.g., DB plan) and risk tolerance,
among other parameters.
Judge Selna cited a 2023 Fourth Circuit
Court of Appeals' decision in noting that
" prudence looks for process, not results. " In
that spirit, he concluded that " Considering participant
demographics and the plan's unique
circumstances supports a finding of prudence, "
ruling in favor of an engineering firm and its
retirement plan investment manager.
Fortunately, the DOL has provided an outline
for this process. Don't look that gift horse
in the mouth.
Richard Weiss is Chief Investment Officer, Multi-Asset
Strategies, American Century Investments.
Diversification does not assure a profit, nor does
it protect against loss of principal. The opinions
expressed are those of Richard Weiss and are no
guarantee of the future performance of any American
Century Investments fund. This information is
for educational purposes only and is not intended
as investment advice.
*The modern portfolio theory (MPT) is a practical method for
selecting investments in order to maximize their overall returns
within an acceptable level of risk. This mathematical framework is
used to build a portfolio of investments that maximize the amount of
expected return for the collective given level of risk.
**Sway Research, The State of the Target-Date Market 2024.
Robert Lauderdale et al., v. NFP Retirement, Inc., et al., 8:21-cv00301-JVS-KES,
(C.D. Cal. Feb. 23, 2024).
Benjamin Reetz v. Aon Hewitt Inv. Consulting, Inc. (Reetz II), 74 F.4th
171, 182 (4th Cir. 2023); Robert Lauderdale et al., v. NFP Retirement,
Inc., et al., 8:21-cv-00301-JVS-KES, (C.D. Cal. Feb. 23, 2024).
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401(k) Specialist Issue 2 - 2024

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