Employers genuinely are confused about what to do regarding qualified default investment alternatives, and brokers confirm they have good reason to be baffled.

"There is no right answer [with QDIAs]," reports Christopher Thompson, a managing director and head of investment product management at Putnam Investments, based in Boston. "It depends on the plan [and] on the age of the participant."

QDIAs allowed under the Pension Protection Act include prediversified, multiasset plans, such as target-date or age-based funds; balanced or risk-based funds; and professionally managed accounts.

While target-date funds appear to be the most popular QDIA to date, there are some drawbacks with them. Specifically, they're solely based on a projected year of retirement, whereas a managed account can consider many factors beyond that year.

Getting a participant to make informed decisions is easier said than done, however.

"Experience has shown us that most participants are unwilling to make the extra effort required for a managed account," says Mark Fortier, defined contribution investment manager at Alliance Bernstein, an asset management firm based in New York City.

Therefore, says Fortier, "a managed account is better suited for active investors that are engaged in the planning process versus defaulted or accidental investors that simply want it done for them."

Both Thompson and Fortier presented at this year's ASPPA 401(k) Summit in Orlando, Fla., sponsored by the American Society of Pension Professionals and Actuaries.

Age-based vs. risk-based

By all indications, an increasing number of employers are moving toward automatic enrollment for defined contribution plans. According to Putnam Investments, roughly one-quarter of DC plans use auto-enrollment, and more than half are projected to use it within three years.

Assuming that employers will consider a target-date or risk-based QDIA, fiduciaries should conduct a wealth accumulation analysis to determine which approach works better, Thompson recommends. "In an attempt to find a solution that fits everyone, you may overlook some risks. A wealth accumulation analysis captures the full impact of investment decisions on the portfolio and therefore provides a good measure of DC asset performance."

When choosing age-based or risk-based alternatives, employers should make sure fiduciaries are assessing the ability of plans to accumulate and keep wealth, while ensuring participants don't opt out of plans.

Pros, cons of target-date

While target-date funds are the most popular QDIA, Fortier stresses that their strength is sometimes seen as a weakness. "Asset allocations should reflect assets held outside the plan," he says, "but it's not a certainty participants will provide this information. Also, assuming everyone is the same, based on age, is too simplistic."

In the traditional framework of DC plans, participants were required to make these choices on their own. The complexities of retirement planning proved too onerous for most participants, however, which led to the advent of auto-enrollment. "The new 401(k) [model] defaults participants into their investments and into the plan," says Fortier. "Behind all of this is the behavioral finance perspective that inertia and procrastination are forces that unfortunately keep many people from saving and investing."

The bottom line, says Thompson, is that the responsible choice is not for every employer, nor is it as apparent as it first may seem. Employers should assume fiduciary duties carefully, studying their workforce to consider risk tolerance, he recommends. Says Fortier, "We're all looking for the silver bullet, but I don't think it's there. Informed decision-making is the key."