Evaluating Your QDIA: A Fiduciary's Essential Guide

As a fiduciary overseeing an ERISA plan, selecting and regularly evaluating your plan's Qualified Default Investment Alternative (QDIA) is one of your most critical tasks. The QDIA is the default investment option for participants who do not actively choose where their contributions should go, making its performance and suitability paramount to your plan's overall success [1].

"Fiduciaries should review the performance of each available QDIA option against appropriate benchmarks. Benchmarks for TDFs might include peer group comparisons or custom benchmarks that include a mix of indexes reflecting the asset classes used in the glide path." [2]

1. Performance Review: Start with the numbers—specifically, the QDIA's performance relative to appropriate benchmarks. Your goal is to ensure that the QDIA delivers competitive returns while maintaining a risk profile that is suitable for the plan participants. This involves comparing the QDIA's returns over various time frames (1, 3, 5, and 10 years) to relevant indices and peer groups [2]. Keep an eye on consistency; a QDIA that occasionally outperforms but often lags behind may not be the best choice for your participants.
2. Fee Analysis: Fees can have a significant impact on participants' retirement outcomes, so evaluating the cost structure of your QDIA is crucial. Review the expense ratio and any additional fees associated with the investment option. Compare these costs to similar funds in the market. High fees should raise a red flag unless there is a clear justification, such as exceptional management or unique benefits. Remember, as a fiduciary, you must ensure that the fees are reasonable in light of the services provided [3].
3. Suitability for Participants: Your workforce is unique, and so are their investment needs. The QDIA you choose should reflect the demographics of your participants. For example, if your workforce is generally younger, a target-date fund with a more aggressive investment mix might be appropriate. Conversely, if your participants are closer to retirement, a more conservative option might be better suited. Consider the age, income levels, and retirement timelines of your participants to ensure that the QDIA aligns with their needs [4].
4. Documentation and Ongoing Monitoring: Documenting your evaluation process is not just good practice—it's a fiduciary necessity. Keep records of the criteria you used, the comparisons you made, and the conclusions you reached. This documentation will be invaluable if your decision-making process is ever questioned [5]. Regular monitoring is also essential. A QDIA that is suitable today might not be the best choice five years from now. Set a schedule for periodic reviews—at least annually—and stick to it. During these reviews, revisit performance, fees, and suitability to ensure that the QDIA continues to meet the needs of your participants and the fiduciary standards required under ERISA [1].
5. Leveraging Expertise: Finally, don't hesitate to seek expert advice. Engaging an investment consultant or a financial advisor who specializes in retirement plans can provide additional insights and help you make more informed decisions. Their expertise can be particularly valuable in navigating complex investment strategies and ensuring that your QDIA remains aligned with best practices and regulatory requirements [3].

"Fiduciaries should consider how these factors and methodologies align with the plan's philosophies and objectives as well as with participants' abilities to meet their retirement needs." [2]

In conclusion, evaluating your QDIA is a multifaceted process that requires diligence, attention to detail, and a commitment to acting in the best interests of your plan participants. By systematically reviewing performance, fees, and suitability—and by documenting and revisiting your decisions—you'll not only fulfill your fiduciary duties but also help secure better retirement outcomes for your employees.

For support in managing your fiduciary responsibilities, visit Fiduciary In A Box.  

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References:

 [1] Russell Investments. (2019, June 24). Evaluating managed account performance. Retrieved from https://russellinvestments.com/us/blog/evaluating-managed-account-performance 

 [2] Stradley Ronon Stevens & Young, LLP. (2023). Fiduciary considerations: The qualified default investment alternative. Retrieved from https://www.stradley.com/-/media/files/publications/2023/10/fiduciary-considerations20230831.pdf 

 [3] 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/ 

 [4] October Three. (2024, May 29). TDF fiduciary hygiene: an appropriate IPS; customized benchmarks. Retrieved from https://www.octoberthree.com/articles/tdf-fiduciary-hygiene-an-appropriate-ips-customized-benchmarks-and-thorough/ 

 [5] Multnomah Group. (2021, January 28). 3 C's of QDIA. Retrieved from https://blog.multnomahgroup.com/forward-thinking/3-cs-of-qdia