QUALIFIED DEFAULT INVESTMENT ALTERNATIVES (QDIAs) are
soluble options to create portfolio growth for defined contribution (DC) plan
participants while protecting plan fiduciaries.
QDIAs were introduced in 2006 by the Pension Protection Act
(PPA) and offer a path for plan sponsors to designate default investment
alternatives for participants who fail to choose investments. Plan fiduciaries
can select between target-date funds (TDFs), lifecycle funds, managed accounts
and balanced funds.
Balanced funds offer a mix of equity and fixed-income
investments. These funds are targeted to the plan as a whole rather than
individual participants, says Douglas Neville, attorney, officer and practice
group leader at Greensfelder, Hemker & Gale, P.C.
Professionally managed accounts are similar to balanced
funds—they also provide a mix of equities and fixed investments—but they are
specifically tailored to each individual participant. TDFs invest based on a
participant’s age or time to retirement, and lifecycle funds invest according
to a participant’s risk tolerance, which also could be based on age.
Providing a QDIA offers two main advantages: For plan
sponsors, it relieves fiduciaries of liabilities related to investment losses,
with the added benefit of automatically providing investments that may lead to
future growth. This is why QDIAs are most popular in plans with automatic
enrollment, Neville says.
“They’re crucial for plans with participants who are not
going to be making investment elections,” he adds. “For someone who fails to
make an investment election, if you can meet the requirements to satisfy the
QDIA rules, it reduces your fiduciary liability significantly.”
Providing a default investment alternative completes all the
work in making an investment choice and simplifies the DC plan process by
automatically investing participants’ long-term savings, Neville explains.
Follow the Rules
One of the most significant requirements plan sponsors must
meet in offering QDIAs is to allow participants to choose their own investment
selections, Neville says. If a participant fails to do so by the required
deadline, then plan fiduciaries can choose a default alternative.
Second, fiduciaries are required to issue a paper copy of
plan notices “at least 30 days in advance of the first time the amount would be
invested in a QDIA,” says Neville. For plans with immediate eligibility, the
notices must be provided as soon as practicable. Plan sponsors are also
required to issue notices annually at least 30 days prior to each plan year.
Plan participants also must be given materials related to
the QDIA, such as prospectuses or notices of how the vehicle invests.
Additionally, the plan must allow participants to switch out of the QDIA as
often as other participants may change their plan investments. At a minimum,
plan participants must be given this opportunity at least quarterly, Neville
notes.
Finally, there are restrictions on a QDIA’s features. For
example, the investments selected cannot impose financial penalties on
withdrawals from the QDIA when a participant is moving funds to other
investment options for the plan.
Robyn Credico, managing director of retirement at Willis
Towers Watson, also mentions that plan fiduciaries must dutifully continue to
monitor a QDIA regularly. “The biggest, most important rule is that a fiduciary
has to be careful of what they pick in a QDIA and they have to monitor it on an
ongoing basis,” she says.
This is particularly true for TDFs. Because TDFs use glide
paths that shift from aggressive to conservative over time and are based on a
participant’s age, it’s trickier to benchmark these investments against other
alternatives. This poses a unique challenge for fiduciaries, Credico says.
“Especially for TDFs, you need to benchmark frequently, as to whether or not it
is appropriate for plan participants and whether your participants are using
it,” she explains.
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