QDIA Lawsuits: A New Fiduciary Risk for 401k Plan Sponsors. Here’s a new risk for plan sponsors to be aware of: you could be sued based on the qualified default investment alternative (QDIA) you choose for your retirement plan.
In other words, participants could claim you failed to fulfill your fiduciary duty if the plan’s qualified default investment option (QDIA) — typically a target date fund (TDF) — doesn’t deliver the expected outcomes, according to a recent article from Employee Benefit News (EBN). According to Willis Tower Watson, 90% of retirement plans now offer automatic enrollment, and 93% of plans use TDFs as their QDIA, the option participant contributions are defaulted into. That’s quite a bit of potential risk exposure for a lot of plan sponsors.
So how can you avoid possible litigation over your choice of TDF for your plan’s QDIA? Simple: mind your fiduciary Ps and Qs. For starters, that means keeping detailed and careful written records about the process by which you reviewed, selected and continue to monitor the TDFs offered in the plan. Ideally, their investment strategy should fit your participant demographics, but be sure to document your rationale for choosing your plan’s TDF series either way.
The Department of Labor (DOL) has guidelines on how to choose and monitor QDIAs, so that’s a good place to start your own review in the context of your plan and participants. It’s also important to make sure your plan committee has carefully considered the differences in glide path — “the amount of risk taken on in the plan either to or through retirement” — because not all QDIAs are created equal. Moreover, as plan fiduciaries, sponsors must make sure their committees not only act prudently in choosing the QDIA, but also continue to monitor it for suitability on an ongoing basis.
The DOL says QDIAs can be one of these four types, according to the EBN article:
- A product with a mix of investments that takes into account the individual’s age or retirement date, such as a target-date fund or life-cycle fund.
- An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date, such as a professionally managed account.
- A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual, like a balanced fund.
- A capital preservation product for only the first 120 days of participation.
QDIAs should not be invested in company stock, and should be managed by an investment manager, plan trustee, plan sponsor or committee made up of employees of the plan sponsor.
Roth 401(k)s and in-plan Roth conversions are also gaining in popularity as default options, thanks to tax advantages that allow employees to contribute after-tax dollars and withdraw their savings tax-free at retirement. That said, Roth conversions currently require participants to withdraw their money, pay taxes on their savings, and then re-enroll into the Roth option. It’s complex, but the industry is working on options that may simplify the process by not requiring a full distribution in the future, according to EBN.
The bottom line for sponsors: Like with any investment option in your plan, make sure you are following regulatory guidelines when choosing your QDIA, carefully document the selection process and monitoring procedures, and ensure that you and your committee are always acting in the best interests of your plan and participants. In short, to reduce the risk of litigation, make sure all of your fiduciary bases are covered when it comes to choosing your QDIA and all of the investment options in your plan.
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