Default Investments and QDIAs

When a participant does not provide investment information upon enrollment, ERISA section 404(c) provides protection to plan fiduciaries who utilize certain "default" investment options and follow certain guidelines regarding participant investment offerings.  The use of lifecycle and certain balanced fund options in workplace plans has been greatly expanded over the years. The Regulations provide protection for plan fiduciaries through the use of Qualified Default Investment Alternatives (“QDIAs”). 

The default investment should include a mix of asset classes consistent with capital preservation, or long-term capital appreciation or a blend of both.  Additionally, the plan must offer a "broad range of investment alternatives" for participants to choose among in order to qualify for protection.  Participants must be able to direct investments out of the default investment into one of these other funds no less frequently than quarterly. A communication to employees explaining their investment rights as well as outlining the default fund investment objectives must be provided 30 days before the first investment and annually thereafter. This notice must be easy to understand and explain how assets will be invested in the absence of an election. The notice must communicate that the participant has the right to determine allocation of assets in their account and not rely on the default investment option.  The default investment option must limit fees imposed upon participants who opt out of the default fund.

There are several common types of QDIAs:

1. A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund);
2. 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 (an example of such a service could be a professionally-managed account);
3. 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 (an example of such a product could be a balanced fund).

A QDIA must be managed by an investment manager, plan trustee or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940. The plan fiduciary must prudently select and monitor an investment fund, model portfolio or investment management service within any category of qualified default investment alternatives in accordance with ERISA’s general fiduciary rules.

A QDIA generally may not invest participant contributions in employer securities.

A plan is not required to use a QDIA, but if the plan sponsor would like additional protection, it is available by following the requirements of QDIA. Default investments are typically required for plans with Automatic Enrollment.

A QDIA Notice must contain:

1. A description of the circumstances under which assets in the individual account of a participant or beneficiary may be invested on behalf of the participant or beneficiary in a qualified default investment alternative (no investment direction provided by the participant or beneficiary after given the opportunity);
2. An explanation of the right of participants and beneficiaries to direct the investment of assets in their individual accounts;
3. A description of the QDIA, including a description of the investment objectives, risk and return characteristics and fees and expenses attendant to the investment alternative;
4. A  description of the right of the participants and beneficiaries on whose behalf assets are invested in a QDIA to direct the investment of those assets to any other investment alternative under the plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer;
5. An explanation of where the participants and beneficiaries can obtain investment information concerning other investment alternatives available under the plan.

For additional information regarding default investment options available to your Plan, contact your investment advisor.