QDIAs = investment choice simplification + employer peace of mind.
Rarely do employees have the wherewithal to direct their own retirement plan investments and most often they leave it up to their employer to determine the best choices. As a fiduciary for plan participants, employers have potential liability for the investment choices they offer to employees. The obvious solution for both employers and employees is for the employer to adopt a retirement plan using QDIAs.
QDIAs (Qualified Default Investment Alternatives) provide a unique opportunity for employers to encourage employee retirement investing while limiting employer fiduciary liability and simplifying the investment selection. Whether used for an automatic enrollment plans or when a plan participant fails make investment decisions resulting in a default investment, QDIAs provide employer peace of mind and eliminate the fuss in choosing investments.
Regulatory requirements. Congress and the Department of Labor have issued specific guidelines pertaining to the default selections that participants frequently use. The final regulations do not identify specific investments but rather, QDIAs are intended to function as a single vehicle to assist the employer and to ensure that their employees reach their ultimate retirement needs and goals. Federal regulations describe three long-term choices that are commonly used. These are: Balanced Funds, Managed Accounts, and Target Date Funds.
1. Balanced funds must include a variety of investments that view the entire workforce as a single group and are probably the easiest to evaluate at the onset. Naturally this choice is best for companies whose workforce is more homogenous in makeup. Because of this, balanced funds might work at first until there is a gap in incomes or ages as the company evolves. This characteristic makes their long term suitability harder to monitor and manage.
2. Managed accounts on the other hand, allocate employee savings among the already established choices in the plan according to their age or expected retirement date. This allows for better risk-based changes as an employee nears retirement, and requires less active monitoring on the part of the employees themselves. Managed accounts are the least used method for QDIA (and make up less than 2% of total 401(k) assets) due to the fact that the managed account manager must be the plan sponsor themselves, a trustee, or a 3rd party manager. If the designated company administrators lack the expertise to manage such a program, they must hire a prudent 3rd party to accomplish the task. This can lead to higher costs and does not reduce the need for vendor oversight to ensure the employees best interest is being watched over.
3. Target date funds have taken two iterations in recent years. They are most often referred to as “glide to” or “glide through”, the difference being if they are managed based on whether assets will stay in the plan and be disbursed by the employee for retirement as needed (glide through), or if risk will be managed as if the monies will be rolled out of the plan (glide to) and most likely be moved to a different account outside of the 401(k). The pros and cons of each have taken on its own life recently and merit a discussion which is outside the scope of this summary. The takeaway here is to remember that they are not all created equal, and closer inspection and understanding that is communicated with all plan participants is paramount for successful implementation. In fact, in a 2013 in a Fact Sheet entitled “Target Date Funds – Tips for ERISA Plan Fiduciaries”, the DOL chose to highlight the option due to their widespread use. Remember these are starting points to keep your focus fresh on your plan’s needs, and all decisions should be reviewed and discussed with your internal team and plan consultant.
Until next time, happy saving.
