Does Your Plan Have A QDIA?

A QDIA stands for qualified default investment alternative.  Before we delve into the specifics of what a QDIA is, it is important to understand why the U.S. Department of Labor (DOL) promulgated the QDIA regulations.  Prior to the enactment of the regulations, study after study revealed that as many as one-third of eligible employees did not participate in their employer’s retirement plan.  In an effort to boost participation, employers added automatic enrollment features to their plan.  Unfortunately, these employers quickly realized that some of the participants who were auto-enrolled failed to make investment selections.  These employers were left with no choice but to allocate the contributions into investments.  Because defaulting employee contributions into investment options is a fiduciary function, employers needed protection for their decision. To provide fiduciary protection to employers when defaulting participant contributions into investments, former President George Bush signed into law the Pension Protection Act in 2006, which among other things directed the DOL to issue the QDIA regulations.

In 2007, the DOL published the final QDIA regulations.  These regulations essentially state that if the fiduciary prudently selects and monitors a QDIA and provides the required notices to participants, the fiduciary will be relieved of liability that may result from his decision to default participant contributions into a QDIA.  So what type of investment vehicle is considered a QDIA?  The final regulations provide four-types:

  1. A product such as a life-cycle or target-date-fund[1] that offers a mix of investments that take into account the individual’s age or retirement date;
  2. An investment service such as a professionally-managed account that allocates contributions among existing plan options to provide an asset mix that take into account the individual’s age or retirement date;
  3. A product such as a balanced fund that provides a mix of investments that take into account the characteristics of the group of employees as a whole, rather than each individual; and
  4. A capital preservation product for only the first 120 days of participation.[2]

Determining which QDIA is appropriate for your plan depends on a variety of factors such as the age of your participants, retirement dates, their risk tolerance, etc…  You also need to make sure that the QDIA you choose does not expose your participants to too much risk at or near retirement.  For example, a sampling of 2020 target-date-funds from different fund companies showed some funds with very high equity exposure, with some as high as 70%.  Because all QDIAs are not created equal and there are many factors to consider when choosing an appropriate QDIA, it is advisable that fiduciaries engage an experienced investment professional who can help you select the best QDIA for your plan.  Having an expert to assist you with your QDIA selection will ensure that the fiduciary conducts proper due diligence before making a decision.  The investment professional can also assist the fiduciary with his or her monitoring duties by periodically reviewing the selected QDIA to make sure it remains an appropriate option for the plan.

A QDIA is not just recommended for plans with automatic enrollment features.  Anytime an employer withholds employee contributions, makes a profit sharing contribution, or there is a rollover from an IRA or other plan, and the participant fails to make an investment election, the plan should have a QDIA in place.

For those plans without a QDIA or who are unsure whether their default investment option qualifies as a QDIA, please contact Thomas “Tom” Giedgowd, Chief Investment Officer at (610) 225-1206 or tgiedgowd@cclbenefits.com, or Rich Ritzer, CFP at (610) 225-1523 or rritzer@cclbenefits.com for assistance.

 

Carroll Consultants Advisors, Ltd. is an independent registered investment advisory firm located in Wayne, PA.  The firm provides consulting, investment and fiduciary education services for retirement plan clients throughout the United States.



[1] Please note that money market and stable value funds are not permitted QDIAs.  However, there is a grandfather relief for plans with investments in stable value funds made prior to December 24, 2007.

 

[2] This QDIA option is available only for plans with automatic enrollment features.