Understanding the importance of QDIAs
A QDIA helps protect participants' retirement savings and offers some fiduciary relief to plan sponsors.
A Qualified Default Investment Alternative (QDIA) is an investment option within a defined contribution (DC) plan that is a diversified, professionally managed fund or service. The Department of Labor (DOL) defines three types of QDIAs: target-date funds, balanced funds, and managed accounts.1
The purpose of a QDIA is to provide a prudently managed, default investment strategy that helps protect participants' retirement savings and offers some fiduciary relief to plan sponsors.
Any scenario involving automatic enrollment, non-electing participants, or the desire to enhance fiduciary protections and participant outcomes makes the designation of a QDIA especially important. The below, non-exhaustive list, provides examples which highlights the benefits of designating a QDIA.
-
Fiduciary Protection:When plan sponsors want to mitigate fiduciary liability related to default investments, designating a QDIA may offer a safe harbor for investment outcomes under ERISA, provided all regulatory conditions are met.
-
Automatic Enrollment:When a plan automatically enrolls employees without requiring them to make active investment choices, a QDIA helps ensure their contributions are invested from the beginning.
-
Participant Benefits:
A QDIA helps to ensure participants are invested in a diversified, professionally managed portfolio. They may also be able to address a potential lack of knowledge or comfort in making asset allocation decisions and can help eliminate possible delays in investing deferrals.
- When the goal is to promote long-term retirement savings and reduce participant inertia, QDIAs help guide participants toward a diversified, professionally managed portfolio.
- When a plan has participants with varying ages, risk tolerances, or investment knowledge, a QDIA such as a target-date fund can automatically adjust the investment portfolio over time, catering to different needs.
- For employees who do not select their own investments, a QDIA provides a default that aligns with industry practices and regulatory requirements, helping to avoid defaulting into inappropriate investments while diversifying the employee’s portfolio.
-
Encourages Retirement Savings:QDIAs may promote consistent saving behavior by providing a clear default. They may also support long-term retirement readiness by helping to reduce the impact of poor decision-making, such as panic selling or market timing, by providing a disciplined, long-term investment approach.
Discover more about QDIAs
Selecting a QDIA
The Dual QDIA Strategy
1 Target date funds (also referred to as life-cycle funds): a product with a mix of investments that takes into account the individual’s age or retirement date.
Balanced funds: a product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual.
Managed accounts: an investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date. Note that capital preservation is a fourth option listed in the regulatory guidance however, we omitted in this paper given it is only permitted to be used for the first 120 days of participation.