Innovation is Key to Long-Term Success in the QDIA Space


Innovation is Key to Long-Term Success in the QDIA Space


The next generation of default investment strategies can help participants plan, save, and generate retirement income

October 2019, BOSTON - Target-date products continue to dominate the Qualified Defined Investment Alternatives (QDIA) landscape; however, providers must innovate beyond current norms to deliver the guidance and custom retirement solutions that participants need, according to the latest research from Cerulli Associates. Providers should look for ways to improve upon engagement strategies, customization abilities, and retirement income options—all in the context of promoting broader financial wellness.

As of year-end 2018, target-date assets represent the majority (58%) of 401(k) net flows. While the 401(k) industry as a whole exists in a state of net outflows (i.e., withdrawals exceed contributions), the target-date market has experienced continued organic growth, and target-date fund managers stand to benefit from a steady flow of contributions to default strategies. Despite this ostensible advantage, asset managers struggle to penetrate the target-date market. The five leading target-date managers collectively account for 77.5% of marketshare, and the largest target-date series are closed-architecture products. Meanwhile, the target-date space has witnessed a drastic shift from active to passive management, with active target-date mutual fund net flows dipping into negative territory in 2018. Furthermore, in the wake of fiduciary lawsuits surrounding fees, any default investments become the subject of intense scrutiny.

“The environment is challenging to navigate as an asset manager,” says Anastasia Krymkowski, associate director at Cerulli Associates. “That said, given the sheer volume of target-date contributions, it still pays to represent a small slice of a big pie.” To succeed in the QDIA space, differentiate their products, and better serve participants in the long run, providers must challenge the status quo while justifying any additional complexity or cost.

Roughly half of investors ages 40 to 69 state they have no source of investment advice or rely on an unofficial source, such as the media or a family member. “The wealth management industry does not address every individual in need of guidance, which creates the so-called advice gap. This is particularly acute for less wealthy investors,” states Krymkowski. In this situation, participants are likely to turn to their employers and third parties (such as recordkeepers, plan advisors/consultants, and managed account providers) for guidance.

When asked which features are likely to emerge in target-date products across the industry, more than 90% of target-date managers view the incorporation of a transition to managed accounts as “highly likely” or “somewhat likely.” This design allows younger participants to benefit from lower-cost options while more closely monitoring investments for individuals nearing retirement. Target-date managers also anticipate developments to include managed payout options and allow for greater customization at the participant level. In keeping this with this view, a growing percentage of defined contribution investment-only (DCIO) managers indicate they offer in-plan retirement income products.

For years, the DC industry has focused on the accumulation phase of retirement planning, but as Baby Boomers enter retirement, plan sponsors are considering the decumulation phase with renewed interest. Complex or less well-known products require additional communication to help participants understand the important features, limitations, and fees associated with their retirement investments. “Participant-facing providers should also make an effort to educate investors about their options and strategies for drawing down from Social Security,” advises Krymkowski. “Taking a holistic view will better prepare them to evaluate potential sources of income and ultimately transition to retirement.”


These findings and more are from The Cerulli Report—U.S. Defined Contribution Distribution 2019: Opportunities for Differentiation in a Competitive Landscape.


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