The concept of QDIAs is evolving to address the diverse needs of retirement plan participants. QDIAs are designated by plan sponsors for participants who have not made their own investment selections. To qualify, in general, a QDIA must incorporate a mix of asset classes aimed at capital preservation and long-term appreciation.

QDIAs include target dates, managed accounts, and balanced funds. However, industry trends have shown a marked preference for target date solutions, which adjust their asset allocation automatically as participants age and come in a range of implementations and vehicles. In 2023, 98% of the plans on our T. Rowe Price recordkeeping platform offered target date investments.¹ Managed accounts, though less adopted as QDIAs, are gaining attention for their personalized investment strategies that can align with individual needs.

Target date strategies continue to innovate and expand

Target date strategies continue to be very popular, and we believe that they support more successful outcomes for retirement investors. In recent years, the target date bucket has expanded and adapted to changes in regulatory guidance, industry practices, technology advances, and market demands. These solutions now include blend strategies and CITs that are accelerating the impacts that target dates have on retirement plan design and are seeing high interest from defined contribution (DC) plan consultants and advisors (Figure 1).

Growing support for active/passive blend strategies

Blend target date strategies represent an innovative approach within retirement plans by combining the benefits of both active and passive investment strategies. Blend solutions have become popular in recent years, especially among investors who don’t view the active/passive debate as an either/or question. Recent data indicate a growing preference for blend strategies over passive‑only ones (Figure 2).

The cost‑conscious nature of plan sponsors is also driving the adoption of blend strategies as a more affordable option without sacrificing the benefits of active management. Their strategic mix of active and passive investments aims to achieve a balance between cost efficiency, diversification benefits, and the potential for excess returns.

By integrating passive investments, these solutions reduce overall fees and provide efficient exposure to certain asset classes. Active management, on the other hand, is employed to seek outperformance and add value through security selection. In addition, it’s a critical consideration for purposeful diversification in a multi‑asset investment given that some asset classes cannot be implemented efficiently with purely passive strategies. In our 2024 DC Consultant Study, consultants and advisors expressed a preference for active management for income‑seeking fixed income diversifiers, such as high yield and emerging markets bonds. Incorporating these asset classes through actively managed strategies can help with credit risk mitigation, as well as duration and interest rate risk management, especially in a changing interest rate environment.

An analysis of data from from Sway Research shows that, as of December 31, 2023, blend target dates have achieved a faster three‑year compounded annual growth rate in assets (12%) compared with active or passive strategies (4% and 10%, respectively), a trend that is likely to continue.

Interest in CITs has grown sharply in recent years

Target date CITs have experienced significant growth in recent years, representing 51% of the $3.8 trillion target date assets as of June 30, 2024. According to Morningstar, CITs have attracted the lion's share of new target date inflows since 2020, and they have now inched past mutual funds as the most popular target date vehicle.²

CITs—also known as collective trusts, commingled funds, or common trust funds—are institutional investment vehicles designed for qualified retirement plans. They pool assets from multiple retirement plans into single portfolios that are managed according to a specific investment strategy. CITs generally have lower fees than mutual funds due to fewer regulatory requirements, lower administrative costs, and economies of scale. This cost efficiency is one of their main attractions compared with mutual funds.

Conversions from mutual fund assets to CITs in DC plans across market sizes is also boosting their market share, and their expected availability to 403(b) plans should spur further growth.

Managed accounts appear poised for future growth

Managed accounts are an important area of anticipated growth for both consultants (68%) and advisors (78%), but they are mostly thought of as an “opt in” option in a plan’s investment menu rather than a QDIA (Figure 3).

However, managed accounts appear to be gaining prevalence in the DC market as a more personalized portfolio solution for older participants approaching retirement. When evaluating potential retirement income products or features, plan sponsors, consultants, and advisors identified solutions with a simple systematic withdrawal capability as the most appealing. Plan sponsors also rated potential investments that incorporate a partial guarantee and target date investments with an embedded annuity feature among the top three appealing ways of delivering retirement income. Guarantees are subject to the claims paying ability of the insurer.

As individuals age, their financial circumstances become more disparate and complex, and differences emerge in retirement goals. Managed accounts can now be used in a dynamic QDIA structure to automatically transition participants from target date solutions into more customized portfolios as they near retirement.³

In a recently published study in the Journal of Portfolio Management titled "Personalized Target Date Funds," our multi‑asset research team explained how personal information can be used to create optimal asset allocations based on an individual's full retirement picture.⁴ Based on Monte Carlo simulation, they estimate that such improvements can add to additional risk‑adjusted spending.

Key considerations for plan sponsors, consultants, and advisors

• Take a closer look at target date strategies: Target dates remain the most popular QDIA option in the industry and continue to evolve. Prudent evaluation of the available implementation styles and vehicles can help ensure your plan is using the right solution that meets participant needs.
• Rethink managed accounts: Plan sponsors who have a high conviction in their target date QDIA can still offer participants an opportunity to personalize their investing experience near retirement. It no longer needs to be target date solutions or personalization—it can be both!

Appendix

2021 Defined Contribution Consultant Study: The study included 51 questions and was conducted from September 20, 2021, through November 2021. Responses are from 32 consulting and advisory firms with more than $7.2T in assets under administration.

2023 Retirement Savings and Spending Study: The study was conducted between July 24, 2023, and August 13, 2023. It included 3,041 401(k) participants, full‑time or part‑time workers who never retired, currently age 18 or older, and either contributing to a 401(k) plan or eligible to contribute with a balance of $1,000 or more. The survey also included 1,176 retirees who have retired with a Rollover IRA or left‑in‑plan 401(k) balance.

2024 Defined Contribution Consultant Study: This study included 48 questions and was conducted from January 12, 2024, through March 4, 2024. Responses are from 35 consulting and advisor firms with over 134,000 plan sponsor clients and more than $7.5 trillion in assets under administration.

2024 Defined Contribution Plan Sponsor Considerations and Actions on Retirement Income Study: The survey was fielded from November 14, 2023, through December 22, 2023. Data reflect responses from 119 plan sponsors that have a role in overseeing and/or selecting their organization’s DC plan investment offerings and indicated a combined approximate DC plan asset size of $100 million or greater.

2024 Exploring Individuals’ Retirement Income Needs and Preferences Study: Data reflect responses from 2,582 individual investors age 40 to 85 who were currently enrolled in a DC plan and had at least $100,000 saved in their plan accounts. The survey was fielded from December 2023 through February 2024.

2024 T. Rowe Price Retirement Savings and Spending Study: The study was conducted between July 17, 2024, and August 7, 2024. It included 3,005 401(k) participants, full‑time or part‑time workers who never retired, currently age 18 or older, and either contributing to a 401(k) plan or eligible to contribute and have a balance of $1,000+. The survey also included 1,012 retirees who have retired with a Rollover IRA or a left‑in‑plan 401(k) balance.