Fred’s Note: A 401k or 403b plan’s default option or QDIA is probably the most important investment decision a plan sponsor will make especially with more companies deploying auto-enrollment. Though the 2006 Pension Protection Act provided safe harbor to use balanced funds like target date, just selecting the record keepers proprietary target date fund is anything but safe. 401kTV columnist and industry expert Dorann Cafaro’s first article in a series on “Making Better Decisions” reviews the overall concept of a prudent process for a plan’s QDIA. (Fred Barstein is the Editor-in-Chief, 401kTV)
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Making Better Decisions: Prudently Selecting a QDIA – by Dorann Cafaro
The statement that you need to have evaluated your Qualified Default Investment Alternatives (QDIA) with a documented prudent process has been bandied about for a few years but what does it really mean?
A Qualified Default Investment Alternative (QDIA) as defined by the Pension Protection Act (PPA) of 2006 is a diversified investment option providing plan sponsors a safe harbor choice when using an automatic enrollment feature where participants may not have made a proactive investment selection. The plan sponsor is really making the investment choice for these participants. This is a fiduciary act under ERISA and thus a legal action as they are exercising control over the plan. A fiduciary simply means a party trusted to make decisions on behalf of the plan and its participants and beneficiaries. Fiduciaries have legal duties or responsibilities to perform. They must act in the sole interest of plan participants and they must carry out their duties prudently as well as follow plan documents, diversify investments and pay only reasonable fees.
The department of labor (DOL) notes that they consider the duty to act prudently is a fiduciaries’ central responsibility. Here is the nub to remember according to the DOL, “prudence focuses on the process for making fiduciary decisions.” It is not about making a wrong or right decision but rather on what was the process you used to reach your decision.
In summary you now know selecting a QDIA is a fiduciary action and subject to fiduciary duties whose center point is acting prudently. You also now know that to act prudently is not just a nice mantra of the press but rather is all about how you make and made your fiduciary decision, the process you go through to come to a decision. Do you have you a clear written process for investment decision-making? If not you will want to start listing the steps taken and the order they were taken in to reach your QDIA selection decision and your on-going QDIA monitoring process.
Over the next several articles we will provide additional help and step-by-step guidance to making better decisions so you will be not only be prudent but be able to document your prudent decision making. This will be particularly important under the new DOL Conflict of Interest Regulation to lessen your liability. Make today a better decision-making day!
