QDIAs for Retirement Plans: Does Your Company Need Them?
You want your retirement plan to attract and retain key personnel, lower overall costs, and contain appropriate and competitive investments. When coming up with the lineup, you may choose a QDIA as a safe-harbor option. A QDIA is an investment fund or option designated as a default fund for investment contributions when employees fail to make an election.
Developed by the Pension Protection Act of 2006, QDIAs seek to increase participation through automatic enrollment but can be applied to any participant enrolled in your plan who hasn't confirmed any investment choices.
A QDIA, if properly selected and implemented, provides you and your plan sponsors with protective relief regardless of the investment outcome of the fund. Some firms see it as a silver bullet to increase plan participation while keeping owners and sponsors better protected.
QDIAs must meet the Employee Retirement Income Security Act’s criteria for protective relief, which includes, but may not be limited to, the following:
- Providing employees opportunities to move assets out of a QDIA just as they do with other plan options.
- Giving plan participants all relevant materials.
- Making sure special communication is provided 30 days in advance of a potential investment in a QDIA.
- Giving participants annual notices describing the circumstances under which their assets may be invested in a QDIA as well as how elective investments are made on their behalf.
- Giving participants the opportunity to direct their own investments regardless of whether they do so.
- Providing participants with a full description of the QDIA, including fees, expenses, investment objectives and risk/return profile.
Know the details
When an employee contributes money to a 401(k) account but hasn't made an investment election, the funds are automatically invested into a QDIA. The plan fiduciary — you or the 401(k) manager — is responsible for selecting the QDIA.
All 401(k) plans should have a QDIA so that you and employees aren't saving without investment elections. Plans with automatic enrollment always need a QDIA, but other situations occur that also result in the need for QDIAs, such as:
- Employer contributions on behalf of an employee who isn't contributing.
- Incomplete enrollment forms.
- Beneficiary or alternative payee balances.
- A qualified domestic relations order is in force.
- Removal of investment options.
- 401(k) rollovers.
- Missing persons.
There are four types of QDIAs:
- A product with a mix of investments that takes into account the individual's age or retirement date — like target date funds.
- An investment service that provides an asset mix based on an employee's current contributions and existing plan options and that takes into account the individual's age or retirement date — like a managed account.
- A product with a mix of investments that accounts for the demographic characteristics of all employees, rather than each individual — like a balanced fund.
- A short-term, low-risk, low-return product for capital preservation for only the first 120 days of participation — like a money market fund.
A QDIA protects your employees from missing out on potential long-term growth when they don't make an investment selection. It simplifies investment decision-making by selecting the 401(k) investments for them — money will automatically be invested in long-term retirement savings. Let us know if we can help you with these issues.
This is just an introduction to a complex and heavily regulated topic. Consult with a qualified professional about the specifics of retirement plan choices.