QDIAs...A Recipe for Fiduciary Protection (and a Better Retirement Plan)
A Qualified Default Investment Alternative – more commonly known as a QDIA – is a provision available to 401(k) and 403(b) plans that reduces the potential personal liability of plan fiduciaries while improving the ability of participants to build toward retirement. For many employers whose plan doesn’t currently have a QDIA, only a few steps are required to take advantage of its benefits.
Most defined contribution plans have a default investment alternative that participants are enrolled in if they refrain from choosing their investments. However, speaking with employers face-to-face, and engaging in a “discovery phase” in which we talk about their plan’s setup and history, I frequently learn that their default is not a QDIA. In some cases, this is because the default into which they are placing participants is one that does not meet QDIA requirements. In other cases, the default would be considered “qualified” but the plan sponsor has not taken the simple notification steps that are necessary to secure QDIA protection for plan fiduciaries.
Since a QDIA offers advantages to plan sponsor and participants alike, one might wonder what would prevent an employer from implementing one.
What I learn as I talk to employers is that many are simply unaware that a QDIA option is available to them. In this case, to make sure their company retirement plan is mitigating risk while doing all it can to help participants, I encourage all plan sponsors to make sure their service providers (advisors, recordkeepers and/or Third Party Administrators) are knowledgeable in all plan areas and provide regular guidance on optimum plan design, investment management and compliance strategies. Then I share the good news: Implementing a Qualified Default Investment Alternative can be accomplished with minimal effort.
What is required to secure the benefits of a QDIA?
First, the sponsor must select a default alternative that is permissible under Department of Labor QDIA regulations. A “cash,” “money market” or “stable value fund” default does not qualify because these alternatives are not regarded as appropriate for meeting an employee’s long-term retirement savings needs. Instead, Target Date Funds, Managed Accounts and Balanced Funds are cited as examples of permissible alternatives.
An important aside would address which qualified default is better to assist participants in building toward retirement. Since the question is worthy of a longer discussion, I suggest reading (if you haven’t) my blog describing the general advantages of managed accounts. Regarding QDIAs more specifically, it is of interest to note that a survey by PLANSPONSOR found that managed accounts “have higher average deferral rates and balances than do participants in plans without managed accounts or with a target-date fund as the QDIA.” In particular, the higher deferral rates were shown to be consistent across all plan sizes.
After the sponsor has selected a permissible default, employees must be notified of the QDIA, as well as its objectives and fees. (I find that it is only this final step that is preventing many employers from taking advantage of QDIA protections, when they already are defaulting into a permissible alternative!) The notification must be timely: 30 days prior to eligible participation, recurring annually. The retirement plan’s Investment Policy Statement must also be updated to reflect selection and monitoring criteria for the qualified default.
Some plan sponsors might question whether they indeed could be found liable for defaulting participants into any alternative. Many employers recognize their employees have the opportunity – and the responsibility – for making their investment selections. An employee’s failure to act, many point out, should mean the consequence of imprudent investment choices fall on the participant’s shoulders, not those of the plan sponsor. But that’s simply not the case, as has been affirmed by the courts.
As another aside, you may find it interesting to know about the history of QDIAs. They were made possible with the passage of the Pension Protection Act in 2006. The PPA also first allowed employers to automatically enroll employees and automatically increase their deferrals in an effort to increase employees’ participation in their company retirement plans (see my blog on solving low 401(k) participation issues). At the time, Congress also recognized some automatically-enrolled employees might not select where their deferrals would be invested and that this would create potential liability for employers. Thus, the QDIA was created and made available to plans with and without automatic features.
If you are interested in discussing how to implement a QDIA, I’d welcome your call or email, just as I welcome the opportunity to meet with any plan sponsor – whether or not your plan has a QDIA – to discuss improving your 401(k) or 403(b) plan.
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.