Understanding the Different Types of QDIAs

When employees participate in an employer-sponsored retirement plan but don't choose how to invest their contributions, the plan sponsor must step in to make those decisions. To ensure these investments are managed prudently, ERISA regulations allow the use of Qualified Default Investment Alternatives (QDIAs). A QDIA provides a safe harbor for plan fiduciaries, offering them protection from liability if they follow specific guidelines [1]. But not all QDIAs are created equal. Here's a closer look at the three primary types: Target Date Funds, Balanced Funds, and Managed Accounts.

Target Date Funds (TDFs):  

Target Date Funds are designed with a specific retirement date in mind, typically aligning with a participant's expected retirement year. These funds automatically adjust their asset allocation over time, becoming more conservative as the target date approaches [2]. Early in a participant's career, the fund might invest heavily in equities to maximize growth potential. As retirement nears, the fund gradually shifts to more conservative investments, like bonds, to preserve capital. This "set-it-and-forget-it" approach makes TDFs a popular QDIA choice, especially for participants who prefer a hands-off investment strategy [3].

"While there are three categories of QDIAs, TDFs have the lion's share of defaulted participant assets."

Balanced Funds:  

Unlike Target Date Funds, Balanced Funds maintain a fixed asset allocation regardless of the participant's age or time horizon. Typically, these funds are split between equities and fixed income, offering a balance of growth potential and risk mitigation [4]. The constant asset mix aims to provide steady returns while minimizing the volatility associated with an all-equity portfolio. Balanced Funds are suitable for participants who value consistency and are comfortable with a moderate level of risk throughout their investing years.

Managed Accounts:  

For a more personalized approach, Managed Accounts offer professional management of a participant's retirement portfolio. Unlike TDFs and Balanced Funds, which follow a predetermined asset allocation model, Managed Accounts tailor the investment strategy to each participant's unique circumstances, such as age, income, risk tolerance, and retirement goals [1]. A financial professional regularly adjusts the portfolio to align with the participant's evolving needs. This hands-on management makes Managed Accounts an attractive QDIA for participants seeking a customized investment experience, though typically at a higher cost.

In choosing a QDIA, it's crucial for plan sponsors to consider the unique needs of their employee population. Each type of QDIA offers different benefits and potential drawbacks, so understanding these options is key to making an informed decision [2]. Whether it's the automated glide path of a Target Date Fund, the steady mix of a Balanced Fund, or the tailored approach of a Managed Account, selecting the right QDIA can significantly impact participants' retirement outcomes.

"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 [5].

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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] SmartAsset. (2021, November 10). Qualified Default Investment Alternative (QDIA). Retrieved from https://smartasset.com/retirement/qdia 

 [3] Income America. (n.d.). QDIA Options | Qualified Default Investment Alternatives. Retrieved from https://incomeamerica.com/articles/qdia-default-options-for-employee-retirement-plans/  

 [4] 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

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