Barbara
E. Williams, CFA
Managing
Director
Bridgebay
Financial, Inc.
The Pension Protection Act (PPA) of 2006 introduced
the qualified default investment alternative (QDIA) as a safe harbor
investment. The final QDIA regulation issued in October 2007 was followed by a
DOL fact sheet and Field Assistance Bulletin (FAB) No. 2008-03 in April 2008.
At that time the DOL issued regulations to guide
plan sponsors in the selection of appropriate default investments for the
employer defined contribution plan.
QDIAs generally apply to any participant that is enrolled in the
retirement plan and has not made an investment choice or has not made an “affirmative
investment” selection. QDIAs are most
frequently used to default employees under automatic enrollment.
The DOL designated the types of investments that
qualify as QDIAs which include age-based asset allocation funds (target-date
funds), risk-based asset allocation funds, managed accounts and balanced funds.
The DOL regulation did not include stable value funds, GICs and money market
funds as QDIAs.
Since the DOL’s QDIA regulation, most plan sponsors
have designated a QDIA for their defined contribution plan’s automatic
enrollment default investment.
Target-date funds have become the most popular QDIA choice by plan
sponsors.
Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries
In February, 2013 the Department of Labor’s EBSA
released a fiduciary guidance for plan sponsors to establish a process for
evaluating, selecting, and monitoring target-date funds. QDIA options should be
evaluated for transparency, overall
performance, risk management, fees and participant understanding.
The publication highlights that plan fiduciaries
should:
1. Establish a process to compare and select TDFs
against peer groups and benchmarks
2. Develop a periodic review process to ensure
performance and soundness
3. Understand the glide path, asset classes and
underlying investments
4. Evaluate expenses for reasonableness
5. Consider custom or non-proprietary TDFs as
alternatives
6. Develop effective employee communications
specific to TDFs
7. Use independent, third party resources to
evaluate TDFs
8. Document the decision making process
Safe Harbor Conditions for QDIAs
The QDIA regulation offers a safe harbor for plan
sponsors seeking legal protection from fiduciary liability for enrolled
participants that do not make an investment selection. The QDIA regulation, however, still requires
that fiduciaries prudently select and monitor QDIAs.
Plan sponsors must meet certain conditions in order
to benefit from safe harbor protections:
•
Participant balances must be invested in the
plan’s designated QDIA
•
Participants must have been given an opportunity
to make an investment decision and decided not to make a selection
•
Participants must be notified in advance of the
initial QDIA investment, followed by annual notifications
•
The notice should include an investment
prospectus
•
Participants must be able to change out of their
QDIA investment, at least quarterly or comparable, into other investments in
the plan
•
Participants must be able to opt-out of the plan
and/or the QDIA without incurring high fees or penalties
ERISA Section 404(c) Safe Harbor
•
Compliance with ERISA Section 404(c) may relieve
plan fiduciaries of liability for investment losses from a participant that
exercises control over assets in their account.
The plan must offer a broad range of investment choices and the
participant must be able to exercise control in their accounts.
•
Default investments that qualify as QDIAs can
also provide plan sponsor protection under ERISA Section 404(c). Under this safe harbor, the plan sponsor is
not liable for investment losses by the participant as long as the plan sponsor
has made the appropriate QDIA notifications, provided opportunity for opt-out,
and conducted a due diligence in the selection and monitoring of the QDIA for
the plan.
•
Plan sponsors select a QDIA so that they may
have a fiduciary safe harbor when they default participants to the investment
option and use auto-enrollment to increase plan participation.
•
Plan sponsors tend to select a QDIA in
conjunction with automatic enrollment when their participants do not make their
own investment selection.
•
The QDIA affords fiduciary protection to the
plan sponsor in the designation of a default option, however, the fiduciary is
still responsible for the investments' due diligence, understanding, selecting,
monitoring the funds and fees of the QDIA investments.
Conclusion
Surprisingly, given the safe harbor available to
plan fiduciaries by including a QDIA in the plan and relying on the 404(c) safe
harbor, there are still some plan sponsors that have not updated their plans
and are inadvertently foregoing the safe harbor protections available to
them. Amazingly, there are still plan
sponsors that may not be aware of the advantages and fiduciary relief offered
by using QDIAs. There is still a strong
need for fiduciary education for plan sponsors.
Plan sponsors that were prompt to adopt a QDIA for
their plans are now re-evaluating the QDIA they had originally selected to
ensure that the choice is still appropriate for the plan. A QDIA review entails the same level of
investment due diligence applied to other investment choices in the plan's fund
line-up.
