Qualified Default Investment Alternatives have been used in retirement plans for over ten years. They were established to provide some direction and safety to plan participants and plan sponsors. Qualified Default Investment Alternative (QDIA) choices are now available in most self-directed retirement plans. As an update to the QDIA topic that has appeared in this publication let’s address the strides and challenges for qualified plan investors over the years regarding their 401(k) investments. Many may feel it can be too cumbersome to make one’s own investment elections, therefore it is possible some participants make a conscious choice that the QDIA is the correct investment decision for them. Similarly, it is likely that many participants whose investments are in QDIAs are overwhelmed by the investment process. It could also be that participants lack the level of understanding to conduct their own research. Or quite possibly, the investors are procrastinators and this task of investing never rose to a level of high priority.
Are today’s QDIA offerings a good choice or not?
What is a QDIA?
As has been previously reported, default investments are not new, however they became much more common after the passing of the Pension Protection Act (PPA) of 2006. PPA made automatic enrollment features attractive for 401(k) plans. As a result, amending the Employee Retirement Income Security Act (ERISA), PPA created a safe harbor that reduced fiduciaries’ liability if a QDIA is the default investment for participants who make no affirmative election.
Plans with automatic enrollment features need QDIAs to protect plan fiduciaries from potential liability for losses when participants fail to actively direct investments. This can include:
- Incomplete enrollment
- Poor mapping
- Employer contributions on behalf of a non-contributing employee
- Death benefits when a beneficiary has not made investment elections
- Qualified Domestic Relations Orders (QDROs) without investment direction
- Rollovers without investment selections
The Department of Labor (DOL) rules address four types of QDIAs:
- A product with a mix of investments which does take into account the individual’s age or retirement date (e.g., target date funds).
- An investment service that allocates employee contributions among existing plan (e.g., a managed account).
- A product with a mix of investments that does take into account the characteristics of the group of employees as a whole; and
- A capital preservation investment product -such as a money market fund).
A QDIA needs to be managed. This could be in the form of an investment manager, plan trustee, plan sponsor, or a committee comprised primarily of employees. One that is a named fiduciary, or it must be an investment company registered under the Investment Company Act of 1940.
QDIAs, are likely a good choice for most participants, not just those who don’t make an investment selection. A Qualified Default Investment Alternative should protect employees from missing out on potential long-term growth. It will also simplify the decision-making process by selecting the asset allocation of the 401(k) investments for them. It is likely that the Qualified Default Investment Alternative or the QDIA, is the best choice for plan participants.
To learn more about the current state of QDIA’s, click below to Register for the Friday May 1st, 2020 TPSU Virtual Town Hall Meeting click here:
https://register.gotowebinar.com/register/1954167919917024270
