Plan Sponsor Quick Tips: Qualified Default Investment Alternatives (QDIA)

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.

In 2006 president Bush signed into law the Pension Protection Act (PPA), which enabled employers to adopt automatic enrollment features, and alleviated some of the fears of litigation. The idea behind the automatic enrollment is to increase retirement savings for people in benefit plans. The law directed the DOL to assist employers in choosing default investments that would best serve the needs of its employees, if they did not make an election on their own. The DOL proposed a regulation in late 2006 and finally made it public on October 27, 2007 with the following conditions:

• Assets must be invested in a Qualified Default Investment Alternative (QDIA).
• Participants and beneficiaries that have not done so must be given the opportunity to provide investment direction.
• A notice must be provided to participants and beneficiaries before their first investment in the QDIA and annually thereafter.
• QDIA material provided to the plan, such as investment prospectuses, must be given to the participants and beneficiaries, etc.

The final regulation, however, still requires a fiduciary to prudently select and monitor QDIAs. Investments that can be QDIAs under the regulation include:

• A target-date fund, that is selected for a participant based on their age, target retirement date or life expectancy.
• A balanced fund, which provides for a target level of risk based on participants in the plan as a whole.
• An investment management service, such a managed account that is based on the participant’s age, target retirement date or life expectancy.
• A capital preservation product for only the first 120 days of participation.

A QDIA may not generally invest participant contributions in employer securities. A plan sponsor, plan trustee, or investment manager, etc must manage the QDIA. A fiduciary may also obtain safe harbor relief for contributions invested in stable value products prior to the effective date of the final rule. This relief does not apply to future contributions to stable value products. The final version of the regulation effective as of December 24, 2007 can be found at http://www.dol.gov/ebsa/regs/fedreg/final/07-5147.pdf

To see if your plan’s default investment election is a QDIA check with your service provider.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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