Qualified Default Investment Alternatives

Qualified Default Investment Alternatives

The final regulations do not identify examples of specific investment products that explicitly qualify as QDIAs. The regulations instead describe mechanisms for selecting the QDIA.
The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs.

The final regulations provide for four types of QDIAs:

1. A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund);
2. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally-managed account);
3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
4. A capital preservation product (such as a money market account), (this may only be used as a QDIA for the first 120 days of a participant’s or beneficiary’s plan participation).

A QDIA must either be managed by an investment manager, plan trustee, plan sponsor, or a committee comprised primarily of employees of the plan sponsor. The manager must be:

• A “named fiduciary;” or
• An investment company registered under the Investment Company Act of 1940 (in other words, a mutual fund).
  A QDIA generally may not invest any participant contributions in securities of the employer.

QDIA Safe Harbor

The final regulations provide that the following conditions must be satisfied in order to obtain safe harbor relief from fiduciary liability for QDIA default investments:

• Assets must be invested in a “qualified default investment alternative” (“QDIA”) as defined in the regulations (see above).
• Participants and beneficiaries must have been given an opportunity to provide investment direction, but must have failed to have done so.
• Information, such as investment prospectuses, provided to the plan for the QDIA must also be furnished to participants and beneficiaries.
• Participants and beneficiaries must have the opportunity to direct investments in and out of a QDIA as frequently as from other plan investments, but no less frequently than quarterly.
• The fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct their own investments must be limited, as set forth in the regulations.
• The plan must offer a broad range of investment alternatives, as defined in the DOL regulations issued under section 404(c) of ERISA.

The final regulations do not absolve fiduciaries of the duty to prudently select and monitor QDIAs.

The QDIA notice may be delivered electronically. The requirements for electronic delivery are set forth in Treas. Reg. § 1.401(a)-21.

Combined QDIA Notice and ACA Notice

Many self-directed 401(k) plans also have an automatic enrollment arrangement (“ACA”) feature. There are several different types of ACA features. If a 401(k) plan has any of these types of ACA features, then separate notice requirements apply to the plan.

Therefore, it often makes sense to combine the QDIA notice with the ACA notice.

In fact, the IRS has provided a sample notice which does exactly that – it combines a notice for a QACA (a type of ACA) with a QDIA notice. The sample notice also may be customized to work for other types of ACAs, and may otherwise be customized to fit a particular plan’s terms.
Moreover, the DOL has stated that use of the sample IRS notice also satisfies the notice requirements under ERISA sections 404(c)(5) and 514(e)(3), and the DOL’s default investment regulations for a hypothetical plan for which a fiduciary may wish to obtain relief under the QDIA regulations.