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By Chat Cowherd - August 6, 2018
How many times have you tackled a DIY project with the wrong tool simply because you didn't have the right one on hand? The outcome is often less than ideal. Our recent survey of defined contribution advisors1 revealed that many tools available to help clients select an appropriate Qualified Default Investment Alternative (QDIA) have not kept up with changing market conditions. Explore key findings from the survey and learn about a new resource to help with target-date fund (TDF) selection.
Survey Question: “Which best describes your view on the equity markets over the next three to five years?”
Although stock market volatility fell slightly after spiking early in 2018, it is notably higher than a year ago. Now global markets are contending with higher U.S. interest rates and inflationary pressures, U.S. corporate tax reform, trade conflicts and rising energy prices. It's clear that volatility is back in the picture after a prolonged period of high growth with low volatility.
Survey Question: “How are you thinking about positioning client portfolios in the current market environment?
Following an unusual, extended period of relative calm, advisors are expecting a more volatile environment going forward. Advisors have taken a variety of tactics, but most are not making changes to client portfolios.
Advisors' top evaluation metrics:
Advisors told us they care most about the overall risk profile and glide path of their QDIA selections. Yet many do not seem to have the right tools to evaluate what they care about most. Of the five tools advisors told us they use, three are based on past performance measures and two were proprietary tools with no transparency provided on the evaluation process.
Backward-looking, return-based metrics reveal little about the competing risks participants are exposed to over the entire glide path. Instead, fiduciaries should consider a forward-looking, risk-based framework to evaluate potential glide path risks over a complete market cycle.
Survey Question: "Which of the following is the most important risk to help solve for DC participants?"
Survey Question: "What is your plan sponsor clients' top concern as it relates to TDFs as the QDIA?"
Selecting an appropriate default investment might be easier if there was just one type of participant demographic, one kind of market environment, or one source of risk to address. However, fiduciaries should consider a variety of factors, especially if the overriding goal is to provide a diverse group of participants with the greatest likelihood of reaching fully funded retirements.
Participant behaviors, such as poor savings levels or abandonment of investment strategies, was the top concern for advisors. Plan design decisions such as automatic enrollment, re-enrollments and matching contributions may help address some of these issues.
Advisors also can help plan decisionmakers address concerns about downside events by evaluating Investment Policy Statements (IPSs)2 and moving beyond simple past performance metrics. By bringing in a comprehensive framework with forward-looking measures to evaluate strategies across multiple major risks and market cycles, they may be able to improve the likelihood of providing successful retirements for plan participants.
Learn about a new, free resource that brings in forward-looking, customized analysis to TDF selection.
The roller-coaster ride of 2018 provides important reminders about market behavior—particularly after several years of consecutive returns.
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Hear from Rich Weiss, CIO-Multi-Asset Strategies, as he shares his insight on our forward-looking framework for fund analysis.
Target-date funds are the most common qualified default investment alternative used in retirement plans today. Changing market conditions make selecting and monitoring these investments challenging.
November 15, 2018
Our survey of DC advisors revealed a mismatch between tools and goals in the qualified default investment alternative selection process.
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Health Savings Accounts (HSAs) boast what other investment accounts cannot: triple tax benefits for eligible medical expenses. They also offer another way to save for retirement. However, investors may need to overcome some misconceptions to make the most of this largely untapped benefit.
May 24, 2018
1 Assessing QDIA Selection and Monitoring Criteria. American Century Investments. May 2018.
2 An investment policy statement (IPS) outlines the underlying philosophies and processes for the selection, monitoring and evaluation of the investment options utilized for a plan.
A target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.
Each target-date portfolio seeks the highest total return according to a preset asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio's allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and money market instruments.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.