You might be interested in knowing five things about qualified default investment alternatives (QDIAs) that might not be on your radar screen. Let’s start by defining QDIA. ERISA and Department of Labor regulations define how plan fiduciaries can manage the risk for investment decisions made by employees in participant-directed 401(k) plans.
A QDIA has several purposes for plan sponsors and participants:
- It encourages participants to select an appropriate investment for long-term retirement savings;
- It offers asset-class diversification to manage inflation and market risks;
- It can reduce a plan sponsor’s liability for losses that result from investments in the QDIA, so long as the plan is compliant; and
- It forces participants to make an affirmative election to invest differently.
So, what are the 5 nuances that plan sponsors should know about these vehicles?
Balanced investments and managed accounts can be used as QDIAs, in addition to lifecycle or a more traditional investment products”.
The point here is that the choice of QDIA that is best for your employees (and there can be a mix of more than one) may benefit from the perspective of an independent retirement-plan advisor.
Second, you are not required to offer a QDIA, unless, of course, you want to benefit from the potential for reduced fiduciary liability associated with the new guidelines. While it is somewhat easier to obtain 404(c) relief under the QDIA umbrella, if you had those 404(c) practices already in place, you can keep them intact by doing what you were doing before the PPA regulations were issued.
Third, while QDIAs offer plan sponsors relief in some areas, they are still responsible for prudent selection and monitoring of appropriate QDIAs. This includes documenting the due diligence process that they followed when choosing the QDIA. According to the DOL regulations, consideration of all costs and fees are important to the selection process.
Fourth, communicate, communicate, communicate. Don’t neglect the requirement to notify any defaulting workers that they are being defaulted, and that they have a right to opt out—both at enrollment and annually.
Finally, while it is true that QDIA-eligible investments offer convenience to both plan sponsors and participants, they aren’t the only prudent choice for a default option. A well-considered, researched and carefully monitored investment can still be a suitable choice for many plans — even if it doesn’t meet QDIA requirements.
As an independent financial advisor who primarily focuses on retirement plans, I can provide the insight and objective guidance to help you sort through how QDIA rules impact your plan…and determine whether a current default investment option complies with current QDIA regulations.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.
