Annuities in QDIAs

Qualified Default Investment Alternatives (QDIAs) play a critical role in defined contribution retirement plans by protecting plan fiduciaries when participants fail to make affirmative investment elections. As retirement challenges increasingly shift from accumulation to income sustainability, plan sponsors and regulators have focused greater attention on whether and how guaranteed lifetime income products, particularly annuities, can be incorporated into default investments. Recent guidance from the U.S. Department of Labor (DOL), especially Advisory Opinion 2025‑04A, has provided important clarification. The following discussion explains how annuities may be integrated into QDIAs, the regulatory conditions that apply, and the implications for fiduciaries and plan sponsors.

Annuities and the Structure of QDIAs

Annuities can be included within a QDIA, but they generally cannot serve as a standalone default investment. Instead, annuity features, such as guaranteed lifetime income or guaranteed lifetime withdrawal benefits (GLWBs) may be embedded within one of the three primary QDIA categories: target date funds, balanced funds, and managed accounts. These default investment structures are designed to balance risk and return for participants who are automatically enrolled or otherwise defaulted into the plan.

Target date funds may incorporate annuity or guaranteed income components, often increasing exposure as participants approach retirement. Balanced funds may include annuity purchase rights or investment guarantees while maintaining diversified allocations across equity and fixed income asset classes. Managed accounts, which are overseen by professional investment managers, allow for more customized allocation decisions and can gradually introduce lifetime income strategies as participants age, commonly beginning around age 50.

Regulatory Framework and QDIA Requirements

QDIAs are governed by ERISA and related DOL regulations, which impose specific safe harbor requirements. Core requirements include diversification across asset classes, participant notice obligations, and liquidity protections. Participants must generally be able to transfer assets out of the default investment at least quarterly without penalty, and no surrender charges or liquidity restrictions may apply during the first 90 days after a participant’s initial default investment.

Importantly, the inclusion of annuity features does not override these requirements. Annuity components must operate in a manner that preserves diversification and liquidity and must not impose impermissible fees or restrictions. Participants must receive advance notice of the QDIA before default investment occurs and must continue to receive annual notices explaining the default investment and their right to opt out.

DOL Advisory Opinion 2025‑04A and Lifetime Income

In late 2025, the DOL issued Advisory Opinion 2025‑04A, which directly addressed whether a managed account program incorporating a variable annuity with a GLWB could qualify as a QDIA. The DOL concluded that such a program does not fail to qualify as a QDIA solely because it includes a guaranteed lifetime income component, provided that all other QDIA requirements are satisfied.

A GLWB provides a guaranteed stream of income for life, even if a participant’s account balance is depleted due to poor investment performance or longevity. These guarantees protect against both market risk and the risk of outliving one’s savings. While the advisory opinion technically applies only to the firm that requested it, the DOL’s reasoning is widely viewed as broadly applicable across the retirement plan industry.

Notably, the DOL emphasized that its position on annuities in QDIAs is not new. Earlier regulatory preambles had already stated that annuity purchase rights, investment guarantees, and features common to variable annuity contracts do not, by themselves, disqualify an investment from QDIA status.

Fiduciary Responsibilities and Safe Harbors

Selecting an annuity provider is a fiduciary act subject to ERISA’s duties of prudence and loyalty. Advisory Opinion 2025‑04A reaffirmed that fiduciaries may rely on existing regulatory and statutory safe harbors, including those added by the SECURE Act of 2019 when selecting and monitoring insurers that provide lifetime income guarantees.

Where a plan appoints an ERISA Section 3(38) investment manager, that manager may assume responsibility for selecting annuity providers. In such cases, the appointing fiduciary is generally shielded from liability for the manager’s decisions, provided the fiduciary prudently selected and continues to monitor the manager. Co‑fiduciary liability may still apply in limited circumstances, but the advisory opinion reinforced the importance of fiduciary process over the specific product selected.

Practical Context and Policy Developments

The growing interest in lifetime income solutions reflects broader demographic and behavioral trends. Baby Boomers are retiring in large numbers, with more than 11,000 Americans reaching retirement age each day. As a result, retirement planning concerns now focus less on saving and more on generating sustainable income, managing inflation risk, and avoiding the risk of outliving one’s assets. Fear of running out of money often leads retirees to underspend, reducing their standard of living unnecessarily.

Despite these challenges, misinformation, such as claims that annuities cannot be part of default investments has discouraged some plan sponsors from adopting lifetime income solutions. Recent DOL guidance explicitly rejects this interpretation and confirms that annuities may be used as components of QDIAs.

Looking ahead, legislative proposals such as the Lifetime Income for Employees Act could further expand annuity use in QDIAs by relaxing certain liquidity requirements, subject to limits on annuity exposure. Executive actions and anticipated DOL rulemaking also suggest continued regulatory support for lifetime income strategies within defined contribution plans.

The regulatory landscape now clearly supports the inclusion of lifetime income features, including annuities and GLWBs, within Qualified Default Investment Alternatives. While annuities cannot function as standalone defaults, they may be integrated into target date funds, balanced funds, and managed accounts that otherwise meet QDIA requirements. Advisory Opinion 2025‑04A has resolved lingering uncertainty by confirming that guaranteed income components do not disqualify a QDIA and by reinforcing available fiduciary safe harbors.

For plan sponsors and fiduciaries, the key takeaway is that thoughtful process, compliance with existing QDIA rules, and prudent selection and monitoring remain paramount. With regulatory clarity increasing and retirement income needs becoming more pressing, QDIAs are evolving from accumulation‑only solutions into vehicles that can support participants both to and through retirement.

Bridgebay Financial, Inc. provides consulting to employer retirement plans, including 401(k), 403(b), 457, profit-sharing, and defined contribution plans, focusing on investment policy statements, committee charters, asset allocation, and fund selection. The firm’s guidance is delivered through Retirement Committee consultations and does not include discretionary account management. Bridgebay creates disciplined Investment Policy Statements to support plan governance and regulatory compliance, reviewing them annually to help fiduciaries meet their responsibilities. They conduct asset allocation and gap analyses to ensure diversified, efficient fund lineups, and evaluate fund menus for cost-effectiveness and alignment with participant needs, including socially responsible options. Ongoing monitoring, fee analysis, and user-friendly reports help sponsors optimize plan value and make informed decisions through prudent oversight.