Key Points:
- A Qualified Default Investment Alternative (QDIA) is designed for non-engaging (defaulted) participants, yet “managed” account QDIAs claim to provide personalization without any interaction—creating an inherent paradox because they rely exclusively on recordkeepers’ wealth (capacity) data, without regard to participant needs and wants.
- It is very important to integrate risk tolerance (willingness) with risk capacity. Rich people with high risk capacity want to stay rich—they typically have low risk tolerance. Poor people want to stop being poor, so they have relatively high risk tolerance.
- Assets in truly managed accounts far exceed assets in “managed” account QDIAs, leading to confusion between these two distinct kinds of managed account. Assets in truly managed accounts are huge, primarily because rich people’s portfolios are professionally managed. The much smaller amount of assets in managed account QDIAs are not truly managed because they exclude investor goals and preferences.
- A better, less complicated, default solution is a customized target date fund that blends Conservative/Moderate/Aggressive glide paths to match workforce demographics, sets a single retirement age, and uses only plan-approved funds.
I recently wrote that a “managed” account Qualified Default Investment Alternative (QDIA) is NOT actually managed, and that this is a serious problem. In this new article I address the fact that regulations permit this practice, but there is a better, more prudent, approach that fiduciaries and participants should prefer. I also identify two types of “managed accounts”—truly managed and not truly managed. This is an expose’ with a recommended solution.
Think “Emperor’s New Clothes.” I hope you find this discussion revealing and enlightening.
A Situational Paradox is a condition that contains opposing factors that lead to a logical trap with no escape. Managedaccount QDIAs are paradoxical because by definition a QDIA is for people who will not engage, so you can’t actually manage their accounts, and if they do engage it’s not a QDIA. This is more than just a semantical trap because 401(k) participant lifetime savings are at risk. QDIA participants trust their employer to somehow figure out a good solution. They shouldn’t trust if the QDIA is a managed account because their risk tolerance is being ignored.
The Importance of Risk Tolerance
Risk tolerance is the willingness to take risk. It is limited by risk capacity, the ability to take risk, namely wealth. Managed account QDIAs use risk capacity estimated from recordkeeper wealth data and ignore risk tolerance because defaulted participants won’t tell them that, and if they do tell it’s not a QDIA.
When participants do engage to identify their risk tolerance they are not defaulting so they’re not in a QDIA. Assets in truly managed accounts far exceed the QDIA version. It’s important to recognize the distinction between actually managed accounts and actually unmanaged QDIA “managed” accounts.
Some say that risk tolerance is too illusive to capture and that questionnaires fail to obtain accurate readings, but publications like this FINRA article disagree. Also, behavioral scientist Professor Meir Statman has identified the challenges and how to address them. Where there’s a will, there’s a way.
Risk capacity should limit risk tolerance as an upper bound rather than dangerously taking all of it, as is the case with QDIAs.
But can defaulted participants, who are generally not rich or financially sophisticated, actually identify their risk tolerance? Participant surveys say they can: they want to be protected as they approach retirement. Surveys report that defaulted participant risk tolerance is very low near retirement, which is consistent with low risk capacity, so reliance on capacity alone for those near retirement might be all right, but maybe not all right for younger participants, especially if they want a shot at not being poor.
Most assets in managed accounts are in fact actually managed because investors in these accounts are financially sophisticated, so not invested in a default. Here’s the distinction.
Two Types of Managed Accounts: Actually Managed and QDIA
The Investment Company Institute (ICI) reports that total assets in retirement savings plans exceed $50 trillion, with $15 trillion in defined contribution (DC) plans and $20 trillion in Individual Retirement Accounts (IRAs). Cerulli reports that total managed account assets in DC and IRA accounts grew 20% in 2025, from $13.7 trillion to $16.3 trillion due in large part to participant attraction to personalization because investing is personal. What this report, and others like it, fails to acknowledge is the existence of two distinct types of managed accounts—one type is truly managed while the other is not. Truly managed accounts are not QDIAs because the participant actively engages.
Most assets categorized as managed accounts are truly managed but are not in a QDIA. Adoption of the QDIA version has grown, but it remains a minority strategy. According to New England Pension Consultants’ 2024 Defined Contribution Survey, 46% of plans offer managed accounts, but only 9% use them as the default investment.
We focus on the QDIA in this article. Of the $16 trillion in managed accounts, less than $1 trillion is in managed account QDIAs. Rich people do not default; their investments are professionally managed.
Fiduciaries should not confuse the relatively small amount of “managed” account assets in QDIAs with the much larger amount in the real deal; it’s an easy mistake to make. Services like Guided Choice, Wealthramp, ProManage and Edelman Financial Engines require participant engagement, so they are not QDIAs.
Here’s an overview of the (Un)Managed Account QDIA paradox:
Regulations and Prudence
We have researched regulations governing managed account QDIAs and find that they allow current practices that use recordkeeper wealth data to make the important risk decision, with no participant interaction. Under Department of Labor regulations, managed accounts meet the regulatory definition of a QDIA when they allocate assets based on participant characteristics such as age, salary, and projected retirement date.
The underlying assumption is that wealthy people can afford more risk; they have high risk capacity so they can take more risk, but that doesn’t mean they should. Note that the regulations do not require a determination of risk tolerance.
Taking all the risk you can (capacity) puts you in the danger zone. Toning down capacity with risk tolerance puts you in the comfort zone.
Even though the regulations permit the current practice of ignoring risk tolerance, fiduciaries should be concerned. Here’s why.
Fiduciary Responsibilities
“Know your client” goes well beyond wealth alone. Even though there are no specific laws that prohibit reliance on risk capacity alone in managed account QDIAs, this leads to exposure to high risk. Reliance on capacity alone means taking all the risk you can afford or guesstimating how much capacity you want to use up.
ERISA requires fiduciaries to prudently investigate and understand the methodology by which a proposed managed account QDIA determines the appropriate level of investment risk, including whether and how the service evaluates participant-specific risk tolerance, risk capacity, investment objectives, and other material financial circumstances.
Advisors to 401(k) plans are further held to FINRA suitability standards. Registered securities professionals are required to follow FINRA Suitability Rule 2111 that says: the following, with emphases added by me:
“A firm or associated person must have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.
The more a managed account is marketed as personalized—including the recent emergence of personalized target date accounts—the stronger the fiduciary obligation to investigate whether it actually possesses and uses the information necessary to individualize the participant’s portfolio.
Fiduciaries need to know if and how risk tolerance is determined. Smart, prudent investment fiduciaries will avoid managed account QDIAs because they do not integrate risk capacity with risk tolerance.
The following details the importance of integrating risk capacity with risk tolerance.
Risk Should Be Risk Tolerance Limited by Risk Capacity
Because they like being rich, most rich people want to stay rich—they have low risk tolerance that uses only a little of their high risk capacity. A risk tolerance adjusted portfolio for the wealthy will likely not perform as well as an unadjusted portfolio, though it may well provide a more satisfying result. Stocks for the long run has been documented by Professor Jeremy Siegel. There can be an opportunity cost for protecting a fortune against losses.
Because they don’t like being poor, poor people could want to take risk in hopes of not staying poor—they might have high risk tolerance that uses most of their risk capacity. Consequently, reliance on risk capacity alone may be just right for these participants.
You can only know risk tolerance by asking because it’s personal. But when you get an answer, it’s not a QDIA.
A Simpler More Sensible QDIA
Fiduciaries should not choose managed account QDIAs because they are very complicated and paradoxical. Instead of guessing individual risk based on recordkeeper wealth data, a customized TDF should be created for all defaulted participants, following DoL guidance to conform the TDF to workforce demographics.
Specifically, the sponsor chooses the appropriate risk for the TDF QDIA by blending Conservative-Moderate-Aggressive glidepaths, plus setting a retirement age for all who default. And the custom glidepath invests in the funds approved for the 401(k). Voila!
At $5 Trillion and growing, TDFs are the most popular QDIA for good reasons. Note also that TDFs do not claim to manage accounts. Rather, they follow academic lifetime investing theory that integrates human capital with investment capital through time. As human capital depletes, financial capital becomes safer because we become more reliant on it. As shown in the graphic above, we advocate re-risking in retirement to extend the life of investments after you pass through the Retirement Risk Zone.
Conclusion
Risk tolerance (preference) limited by risk capacity (wealth) determines appropriate investment risk. Neither tolerance alone nor capacity alone are sufficient under ERISA’s fiduciary duty. Yet managed account QDIAs rely exclusively on risk capacity derived from recordkeeper wealth data because defaulted participants will not engage in order to disclose their risk tolerance. If a participant does engage, the investment is not a QDIA.
The less than $1 trillion in managed account QDIAs is easily confused with the more than $15 trillion in actually managed accounts. Wealthy people use professional asset managers.
The big mistake in managed account QDIAs is taking more risk than a participant wants, since risk capacity is the most risk you can take. It’s a mistake that is permitted by law but not by prudence standards. A better, simpler, more prudent approach is to customize a TDF QDIA to workforce demographics as recommended by the DoL in its TDF Tips.
Participants who have been defaulted into managed account QDIAs should consider not remaining in that default investment. Roughly 80% of 401(k) participants default their investment election to their employer as a QDIA, so this is a very important topic.
A QDIA cannot be truly managed because by definition its participants do not engage.
EDITOR’S NOTE: 401(k) Specialist is committed to sharing different perspectives from throughout the workplace retirement plan community. The views expressed in guest op-eds and columns are those of the writers and do not necessarily represent the views of 401(k) Specialist.