Dalbar - CFO 401(k) Buyers Guide

Qualified default investment alternatives (QDIA) permit employers to eliminate expensive employee enrollment and education meetings and eliminate liability for accounts that are defaulted.

The QDIA represents the recognition that it is unrealistic to expect millions of workers to become adept at the management of their retirement investment. It is an official sanction of the wisdom of providing an alternative to teaching investing skills to the nation’s workers.

Investment firms have been aggressive in promoting target date funds as a QDIA. So much so, that a very wrong perception has been created. The wrong perception is that a target date fund is a QDIA and that a QDIA is a target date fund. Nothing could be further from the truth.

The language of the regulation is very different from this perception:

There are a number of requirements to achieve the benefits of QDIA. A target date fund is only one of three alternatives that can satisfy one of these requirements.

In summary, an investment option is NOT a QDIA until the following requirements are met:

The investment must be prudently selected through an objective, documented procedure.
The employee must have the opportunity to make an investment selection and does not.
The employee must be given a notice describing the QDIA and his/her rights when the default is made and annually thereafter.
Employee must be provided with information about other investment options available.
Employees must have the right to exit the QDIA with no penalties within 90 days.
There must be a broad range of investment alternatives available to employees.
New long term QDIAs must be one of three permitted alternatives:

Target date portfolio or fund.
Balanced portfolio or fund.
Managed account.

Action:

If you do not have a QDIA begin the process of selecting one. If you do have a QDIA review it to ensure you are in compliance with requirements. See The Final Word on QDIA for how to do this or contact Dalbar.

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