Many headlines say target date investment strategies are the hot trend for retirement plans using a QDIA (Qualified Default Investment Alternative). There is another trend that has not become quite so popular but possibly is even more effective. It’s called outsourcing to an investment manager that takes on the responsibility for your investment menu, a so-called ERISA 3 (38) investment manager. Should you join either of these trends?
Your work load for a QDIA
The premise of a qualified default investment alternative (QDIA) is appealing. Do your employees know what they are doing in picking investments from your plan’s investment menu? Why not let a financial investment firm and their investment managers take on that role. In fact, a target strategy may become a cradle to grave investment strategy. Further, a properly monitored QDIA provide can help you manage your fiduciary responsibilities.
If that’s how you heard it, you didn’t get the full story. First, there are three types of eligible strategies, balanced, risk based or lifestyle and target date. The target date is the most complex of the three. Its complexity requires additional due diligence and monitoring.
In February 2013 the Department of Labor (DOL) put out specific guidelines for the use of qualified default investment alternatives. The DOL drilled into the extra duties required when you select a target date strategy. You are the one responsible for making sure that your qualified default investment alternative actually qualifies. Just because you use a well-known brand-name firm does not mean that your investment actually qualifies as a QDIA. If there were any legal action brought by your participants or the Department of Labor, you would have to defend the choice not the brand-name firm.
If you are not working with a provider that is truly open architecture, meaning that any registered investment is possible you may have a ticking time bomb. The decision why record-keepers include a particular investment is not necessarily based upon the risk/return of an investment. It could simply be that they stand to make more money. If you don’t have time to vet these potential issues that could lead to unnecessary costs for you, this trend may not be the right one for you. Except if you have an ERISA 3 (38) investment manager.
An ERISA 3 (38) investment manager: Time delegation and responsibility delegation
An ERISA 3 (38) investment manager limits your responsibility to the selection and oversight of this investment manager. They must be confident enough and knowledgeable enough to decide to take on the responsibility of your investment menu. However, are they competent? You can work with a retirement plan consultant to judge their competence. The consultant can help you narrow down the field to at least 2. You will prudently select one and then monitoring them at least annually. You may benefit from a consultant helping you with this monitoring report. The benefit of the consultant is to have a subject matter expert on your side of the table.
This gets you out of the need for quarterly review meetings, developing, approving and monitoring an investment policy statement. An investment policy statement is considered best practice in determining an investment menu and then monitoring the compliance of the investments to the metrics that warranted their selection.
Best of both worlds- The ERISA 3(38) and QDIA Combo
There are ERISA 3 (38) investment managers that will select and monitor your QDIA. The choices include a target date investment or asset allocation investment sometimes called a risk-based model or a balanced investment. In this case rather than you needing to go through the process outlined by the Department of Labor in selecting a qualified default investment alternative you now have an ERISA 3 (38) investment manager handling that activity for you. I believe it’s wise to use a retirement plan consultant who specializes in understanding all of these issues to help you screen potential providers of this ERISA 3 (38) investment manager service.
Still not convinced? If you are audited by the Department of Labor or Internal Revenue Service would you be able to:
- Provide all of the documentation to justify your investments and investment service providers
- Demonstrate that you have monitored their activities and removed them when appropriate.
- Show that all of your decisions have been done for the benefit of your employees
We can offer a limit audit of your plan and let you be the judge of your readiness. If you are ready to take this prevention step, contact us.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.