The Pension Protection Act of 2006, signed by President Bush on August 17, 2006, removed several deterrents that made employers hesitant to add an automatic enrollment feature to their 401(k)plan. A key one of these is to allow plan fiduciaries to invest participant assets in certain types of qualified default investment alternatives (QDIA) whenever the participant did not provide investment direction. NOTE: Your plan does not have to include the automatic enrollment option to include a QDIA in the fund lineup.
Employers that provide a Qualified Default Investment Alternative (QDIA) for participants who fail to provide investment instructions will not be liable for any loss that occurs as a result of such investments when the QDIA regulations are followed.
However, the Department of Labor (DOL) also cautions that plan fiduciaries remain responsible for the selection and monitoring of the QDIA, and act solely in the interest of the plan’s participants and beneficiaries. This includes taking into consideration investment fees and expenses.
Choosing a QDIA
At its most basic level, selecting a QDIA should agree with everything in a plan’s investment policy statement. Yet, there are elements to a QDIA – because you are defaulting people into it – that are different. It’s a fiduciary decision and up to the responsible fiduciary, not the investment advisor or other service provider, to decide what makes most sense for your participants and beneficiaries. The final regulation does not identify specific investment products – rather, it describes mechanisms for investing participant contributions.
The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs. The final regulation identifies two individually-based mechanisms and one group-based mechanism, while also providing a short-term investment for administrative convenience.
Four Types of QDIAs
- Age-Based. 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 target date fund (TDFs).
- Risk-based. 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 (for example, a balanced fund).
- 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.
- A capital preservation product for only the first 120 days of participation. This eases administration, for example, in the case of workers that opt-out of participation within 90 days. After 120 days, the plan fiduciary must redirect the participant’s investment into the above three QDIA categories (unless the participant opted-out of the plan or redirected investments during the 90 days).
QDIA Notice Rules
As I mentioned earlier, if the QDIA regulations are followed, the fiduciary will not be liable for any loss that occurs as a result of a participant being invested in a QDIA. Section 404(c)(5)(B) of ERISA explains the QDIA notice requirements. The failure to provide a QDIA notice results in no fiduciary relief being available for the plan year in which the notice is not provided.
The safest approach is to provide the notice to all eligible employees, not just actively contributing participants or those who have a balance in your plan.
The notice must be provided:
- At least 30 days in advance of the date of plan eligibility, or at least 30 days in advance of the date of any first investment in a QDIA
OR
- On or before the date of plan eligibility provided the participant has the opportunity to make a permissible withdrawal (90-day withdrawal under Section 414(w) of the code).
In addition, the QDIA notice must be provided at least 30 days in advance of each subsequent plan year.