Why is Having a QDIA Important?

For employers managing an ERISA-governed retirement plan, having a Qualified Default Investment Alternative (QDIA) is more than just a smart move—it's a crucial safeguard. A QDIA offers protection to employers who might otherwise face legal exposure when participants fail to direct their own retirement investments [1]. Without participant input, the risk of misallocation looms large, which can lead to significant financial shortfalls for employees and potential legal headaches for employers.

The concept of a QDIA was solidified with the Pension Protection Act of 2006 [2]. It recognizes that not all employees are financially savvy or inclined to make investment decisions, yet their financial security in retirement is paramount. A QDIA serves as a safety net, ensuring that their contributions are invested in a way that is generally prudent and aligned with long-term growth, even if they never make an active choice.

"These options really helped address plan fiduciary concerns about the liability of undirected investment decisions," explains Joni Tibbetts, vice president for management, retirement and income solutions at Principal Financial Group [2].

A QDIA typically comes in one of three forms: a target-date fund, a balanced fund, or a professionally managed account [3]. Each of these options is designed to provide a diversified portfolio suitable for the average participant. For instance, target-date funds automatically adjust their investment mix to become more conservative as the participant approaches retirement, offering a "set it and forget it" approach that suits many workers' needs. Balanced funds maintain a steady mix of equities and fixed-income assets, while managed accounts tailor investments to the specific characteristics of the participant base.

Employers who adopt a QDIA are protected by a fiduciary safe harbor, meaning they aren't liable for investment outcomes, provided they've acted in accordance with ERISA's guidelines [4]. This legal protection is invaluable, particularly in today's litigious environment where employers can be held accountable for participants' poor investment results if they were placed in default options that weren't well-constructed or diversified.

But beyond legal protection, a QDIA ensures that all participants, regardless of their engagement level, have their contributions working for them in a meaningful way. Without a QDIA, defaulted participants could end up in overly conservative or overly aggressive investments, jeopardizing their retirement security. By choosing a QDIA, employers are helping to safeguard their employees' futures, promoting better financial outcomes across the board [5].

"For employees, it takes what can sometimes feel like guesswork or maybe uninformed decision making out of the equation and allows the professional money manager to allocate their assets on their behalf with a lot of thought and research behind the decisions being made there," explains David Morehead, vice president at retirement plan adviser OneDigital [2].

In short, a QDIA is a cornerstone of prudent retirement plan management. It not only provides peace of mind for employers but also enhances the retirement readiness of employees who may not have the knowledge or interest to manage their investments actively. Establishing a QDIA is a proactive step that aligns with fiduciary best practices and underscores the employer's commitment to supporting their workforce's long-term financial well-being.

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References:

[1] U.S. Department of Labor. (n.d.). Default Investment Alternatives Under Participant-Directed Individual Account Plans. Retrieved from https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/default-investment-alternatives-under-participant-directed-individual-account-plans 

 [2] PLANSPONSOR. (2022, February 23). QDIA Basics. Retrieved from https://www.plansponsor.com/in-depth/qdia-basics/ 

 [3] Human Interest. (2022, February 10). Using 401(k) QDIA to Limit Fiduciary Liability. Retrieved from https://humaninterest.com/learn/articles/what-is-a-401k-qdia-qualified-default-investment-alternative/ 

 [4] Benefit Trust. (n.d.). QDIA | A Win-Win for Plan Sponsors & Participants. Retrieved from https://benefittrust.com/insights/qdias-a-win-win-for-plan-sponsors-and-participants/ 

 [5] TIAA-CREF. (2009.). What is a Qualified Default Investment Alternative (QDIA)? [PDF file]. Retrieved from https://info.nrao.edu/hr/benefits-forms/qdia-factsheet/at_download/file