The Retirement Learning Center responding to a question about fixed income in default options, or QDIA (qualified default investment alternatives), in a defined contribution (DC) plan answered that to qualify, these default options must include fixed income along with equities citing DOL guidance and field bulletins.
There a huge difference between a QDIA and DIA (designation investment alternative) – QDIAs are frequently used as the sole investment making diversification within that strategy essential. A series of DIAs, that might include equities and fixed income strategies, are used by investors to create their own portfolio with the importance placed on providing a diversified line-up of choices.
Citing DOL guidance on QDIAs and TDFs (Target date funds) which have become the most popular default option in DC plans, the DOL noted:
An investment fund product or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses and that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant’s age, target retirement date (such as normal retirement age under the plan) or life expectancy.
Further explained in a field assistance bulletin:
Each of the QDIA categories … requires that the investment fund product, model portfolio, or investment management service be “diversified so as to minimize the risk of large losses” and be designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures. In the preamble to the QDIA regulation, the [DOL] explains that it did not intend to include funds, products, or services with no fixed income exposure. Although an investment option with no fixed income component may be appropriate for certain individuals actively directing their own investments, the [DOL] determined that a QDIA should have some fixed income exposure. Similarly, a fund, product, or service with no equity exposure cannot qualify as a QDIA …”
So does your QDIA have fixed income? How do you know?
