Saturday, June 19, 2010

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

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