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  • Writer's pictureNicholas Zaiko, CIMA

QDIAs Offer Fiduciary Protection

The Pension Protection Act (PPA) of 2006 introduced the qualified default investment alternative (QDIA) as a safe harbor investment. The final QDIA regulation issued in October 2007 was followed by a DOL fact sheet and Field Assistance Bulletin (FAB) No. 2008-03 in April 2008.

At that time the DOL issued regulations to guide plan sponsors in the selection of appropriate default investments for the employer defined contribution plan. QDIAs generally apply to any participant that is enrolled in the retirement plan and has not made an investment choice or has not made an “affirmative investment” selection. QDIAs are most frequently used to default employees under automatic enrollment.

The DOL designated the types of investments that qualify as QDIAs which include age-based asset allocation funds (target-date funds), risk-based asset allocation funds, managed accounts and balanced funds. The DOL regulation did not include stable value funds, GICs and money market funds as QDIAs.

Since the DOL’s QDIA regulation, most plan sponsors have designated a QDIA for their defined contribution plan’s automatic enrollment default investment. Target-date funds have become the most popular QDIA choice by plan sponsors.

Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries

In February, 2013 the Department of Labor’s EBSA released a fiduciary guidance for plan sponsors to establish a process for evaluating, selecting, and monitoring target-date funds. QDIA options should be evaluated for transparency, overall performance, risk management, fees and participant understanding.

The publication highlights that plan fiduciaries should:

  1. Establish a process to compare and select TDFs against peer groups and benchmarks

  2. Develop a periodic review process to ensure performance and soundness

  3. Understand the glide path, asset classes and underlying investments

  4. Evaluate expenses for reasonableness

  5. Consider custom or non-proprietary TDFs as alternatives

  6. Develop effective employee communications specific to TDFs

  7. Use independent, third party resources to evaluate TDFs

  8. Document the decision making process

Safe Harbor Conditions for QDIAs

The QDIA regulation offers a safe harbor for plan sponsors seeking legal protection from fiduciary liability for enrolled participants that do not make an investment selection. The QDIA regulation, however, still requires that fiduciaries prudently select and monitor QDIAs.

Plan sponsors must meet certain conditions in order to benefit from safe harbor protections:

  • Participant balances must be invested in the plan’s designated QDIA

  • Participants must have been given an opportunity to make an investment decision and decided not to make a selection

  • Participants must be notified in advance of the initial QDIA investment, followed by annual notifications

  • The notice should include an investment prospectus

  • Participants must be able to change out of their QDIA investment, at least quarterly or comparable, into other investments in the plan

  • Participants must be able to opt-out of the plan and/or the QDIA without incurring high fees or penalties

ERISA Section 404(c) Safe Harbor

• Compliance with ERISA Section 404(c) may relieve plan fiduciaries of liability for investment losses from a participant that exercises control over assets in their account. The plan must offer a broad range of investment choices and the participant must be able to exercise control in their accounts.

  • Default investments that qualify as QDIAs can also provide plan sponsor protection under ERISA Section 404(c). Under this safe harbor, the plan sponsor is not liable for investment losses by the participant as long as the plan sponsor has made the appropriate QDIA notifications, provided opportunity for opt-out, and conducted a due diligence in the selection and monitoring of the QDIA for the plan.

  • Plan sponsors select a QDIA so that they may have a fiduciary safe harbor when they default participants to the investment option and use auto-enrollment to increase plan participation.

  • Plan sponsors tend to select a QDIA in conjunction with automatic enrollment when their participants do not make their own investment selection.

  • The QDIA affords fiduciary protection to the plan sponsor in the designation of a default option, however, the fiduciary is still responsible for the investments' due diligence, understanding, selecting, monitoring the funds and fees of the QDIA investments.


Surprisingly, given the safe harbor available to plan fiduciaries by including a QDIA in the plan and relying on the 404(c) safe harbor, there are still some plan sponsors that have not updated their plans and are inadvertently foregoing the safe harbor protections available to them. Amazingly, there are still plan sponsors that may not be aware of the advantages and fiduciary relief offered by using QDIAs. There is still a strong need for fiduciary education for plan sponsors.

Plan sponsors that were prompt to adopt a QDIA for their plans are now re-evaluating the QDIA they had originally selected to ensure that the choice is still appropriate for the plan. A QDIA review entails the same level of investment due diligence applied to other investment choices in the plan's fund line-up.

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