Selecting a QDIA
Despite the obvious benefits of participating in employer-sponsored retirement plans, approximately 30 percent of eligible workers do not participate in their employer's 401(k) plan.1 Today, many plan sponsors are using innovative plan design, including automatic enrollment, to improve the likelihood of their participant's retirement savings success.
Seven years ago, the Pension Protection Act of 2006 (PPA) broke new ground by creating an important provision that affords a "safe habor" for plan fiduciaries using automatic enrollment to increase the overall participation rate in their plans.2
While plan sponsors are still required to carry out their duties with the “care, skill, prudence and diligence” of a prudent person,3 PPA extended existing liability protections to plan fiduciaries that select a default investment (i.e., a "QDIA") for the purposes of automatic enrollment. As long as certain conditions are satisfied, plan sponsors will not be liable for losses that are a result of investing participants' contributions in a QDIA.4
Department of Labor regulations specify four types of QDIAs:2
- Target date funds that provide an allocation based on each participant’s age or expected retirement date,
- A managed account that uses an asset mix made up of existing plan options to provide an allocation based on each participant’s age or expected retirement date,
- A balanced or allocation fund that takes into account the group of participant’s characteristics as a whole, rather than each individual, or
- A capital preservation product, but only for the first 120 days of participation. This is an option for plan sponsors that want to simplify administration for employees that opt-out of the plan.
Know Your Objectives and Assess Your Options
In order to establish an effective procedure for the selection of a QDIA, it’s important to have a firm idea of your plan’s objectives. Rather than simply select the best performing investment within its category, it makes sense to do additional research to make sure that the investment's goals are aligned with the needs of your plan.
Whatever type of QDIA you choose, the following procedures may outline a basic framework for your selection.
Assess your plan’s overall objectives with respect to your participants.
Consistent with that assessment, establish a process for comparing and selecting the QDIA.
Establish a similar process for the periodic review of the QDIA.
Understand the QDIA's allocation and how it may change over time, especially for target date funds.
Review the QDIA's fees and investment expenses.
Assess whether a custom or non-proprietary QDIA could be a better fit for your plan.
Develop effective employee communications.
Document the process.
Franklin LifeSmart Brochure
See the brochure for additional information
Learn more about Franklin Templeton funds that you may consider for use as potential QDIAs for your plan.
- "Automatic Enrollment 401(k) Plans for Small Businesses" at: www.dol.gov/ebsa/publications/automaticenrollment401kplans.html.
- "Regulation Relating to Qualified Default Investment Alternatives In Participant-Directed Individual Account Plans" at: www.dol.gov/ebsa/newsroom/fsQDIA.html.
- As described in ERISA Section 404(a)(1)(B).
- Other conditions include: (1) Before the contribution is deposited, the participant must receive a notice describing the automatic enrollment process, and a similar notice is required to be sent annually thereafter; (2) The participant does not provide investment direction; (3) The plan passes along to the participant material related to the investment, such as prospectuses; and (4) The participant is given the opportunity periodically to direct his or her investments from the default investment to a broad range of other options. [QDIA Final Rule]