The qualified default investment alternative (“QDIA”) is arguably the most important investment in a plan’s investment menu. The QDIA essentially permits participants to opt-out of the investment process, instead choosing to default into the QDIA, with assurance that qualified professionals are acting on their behalf. It may also relieve plan sponsors from the burden and fiduciary liability associated with trying to educate their workers to become sophisticated investors. However, plan sponsors do remain responsible for the prudent selection and monitoring of the qualified default investment alternative.
By far the most often selected QDIA investment is a target date fund (“TDF”) series. TDFs are typically the only investment selection that offers unitized professionally managed portfolios that reflect the participants’ time horizon today and as they go to and through retirement. TDFs are tied to the anticipated year of retirement, so a participant with a projected retirement year of 2035 would be enrolled in the 2035 target date fund. This portfolio will be professionally managed to become more conservative as the participant approaches retirement. This de-risking is based on an investment “glide path” which contains more aggressive investments during the participant’s younger years and utilizes more conservative investments as the target retirement year approaches.
TDF QDIA selection is important for plan fiduciaries as well. The Department of Labor (“DOL”) has indicated that fiduciary liability mitigation is available if the TDF has been prudently selected. Prudent selection includes the following:
- Making sure the TDFs are commensurate with the plan’s participant demographics. A plan’s participant demographic need may tend towards a low-risk portfolio (e.g. participants are on track for a satisfactory retirement), or perhaps a more aggressively positioned portfolio (e.g. less savings so the need to obtain higher returns), or perhaps a multiple glidepath approach for a financially non-homogenous population.
- Comparing the cost relative to other TDFs with similar risk levels.
- Evaluating the quality of the underlying investments of the TDFs.
- Ensuring the TDF suite meets certain structure requirements to qualify as a QDIA, including not imposing financial penalties or restrictions on the ability of the participant to transfer from the fund to any other investment in the plan and being diversified so as to minimize the risk of large losses.
- Providing all required notices. Notice must be provided to participants and beneficiaries 30 days in advance of the first investment and at least 30 days in advance of each subsequent plan year.
Contact our office if you are a plan fiduciary and need target date fund consulting. We will utilize a risk-based process to help you identify a best-fit target date fund series for your plan.