Editor’s Note: This article was co-authored with Lindsey Weeks, Retirement Plan Service Manager
When plan sponsors are designing their company’s 401(k) plan, they can face a lot of tough decisions. Fortunately, the decision to include a Qualified Default Investment Alternative (QDIA) is among the easier ones. If the QDIA selection sounds familiar to you, you probably have some questions like those below.
What is a QDIA?
When money is contributed to an employee's retirement account and the employee hasn’t made an investment election, that money can then be automatically invested into the QDIA as a default. In doing so, a QDIA can provide the potential for long-term growth.
Is there more than one type of QDIA?
The Department of Labor (DOL) advises that a QDIA must be “diversified so as to minimize the risk of large losses” and emphasizes three types of QDIAs:
- A mix of investments that takes into account the individual’s age or retirement date, like target date funds.
- An asset mix based on an employee’s current contributions and existing plan options that also considers the individual’s age or retirement date, like a professionally managed account.
- A mix of investments that accounts for the demographic characteristics of all employees, rather than the individual, such as a balanced fund.
Should my 401(k) have a QDIA?
Every retirement plan design is different, but generally speaking, all 401(k) plans should have a QDIA, because all plans, at some point, could have participants saving without an investment election. Plans with automatic enrollment need a QDIA, but other situations may occur over the life of a 401(k) that result in the need for a QDIA as well, such as:
- Employer contributions on behalf of an employee who isn’t contributing
- Incomplete enrollment forms
- Beneficiary or alternative payee balances
- Qualified domestic relations order
- Removal of investment options
- 401(k) rollovers received without an investment election
- Missing persons
What are the benefits of a QDIA?
Business owners and other plan fiduciaries are afforded protection from fiduciary liability for investment losses if a QDIA election meets certain criteria. For employees, a QDIA protects them from missing out on potential long-term growth when they don’t make an investment selection. It also simplifies investment decision-making for employees by selecting the 401(k) investments for them—the money will automatically be invested in an investment choice that has the potential for growth.
How do I set up a QDIA as part of my company’s 401(k) retirement plan?
As a plan sponsor, you want to deliver a group retirement plan that meets the unique financial needs of your employee base and adheres to the complex rules, regulations and laws. Whether and how to set up a QDIA is just one decision of many required to run a successful plan.
The good news is that you don’t have to do it alone. You can work with a team of professionals that incorporates intelligent plan design support services, ongoing monitoring of vendors and investments, comprehensive retirement plan governance assistance, and operational support to help you feel more confident when it comes to managing your group's retirement plan.
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.
AIF®, Series 7 & 63 Securities Registrations,1 Series 65 & 66 Advisory Registrations† Bill has more than 25 years of experience managing employer-sponsored retirement plans and individual retirement assets. He is responsible for maintaining a high-level of service for 401k and 403b clients, as well as nurturing the growth and development of this area. Beyond these specialties, his experience includes plan design consulting, administration, employee...Read More