Is Your 401(k) Required to Have a QDIA?

DWC | 11/28/17

Facts

Like many 401(k) plans, ours allows employees to decide where to invest their accounts among a menu of approximately 20 different mutual funds. For employees who do not make an investment decision, their contributions are invested in a default fund recommended by our investment advisor.

Question

What sort of information do we have to give our employees about use of this default investment option?

Answer

Use of a default investment option is very common among plans that allow employees to direct their own investments. As with any decision related to selecting options for a plan’s investment menu, the selection of a default option is a fiduciary decision. In short, that means the company must exercise due diligence and select a default option that is in the best interest of plan participants and does not carry any unreasonable fees or expenses.

The retirement plan rules also include something known as a Qualified Default Investment Alternative or QDIA. There are a number of requirements, but generally speaking, balanced funds and other options that take into account a participant’s age and/or retirement date can potentially be used as QDIAs.

Companies that select a valid QDIA and provide an annual notice to employees 30 days before the start of each year are deemed to have satisfied their fiduciary duties with respect to the selection of the default investment. The notice must explain the risk/return characteristics of the default fund as well as the fees, and it should notify participants that they have the right to change how their accounts are invested and who to contact for additional information.

It is worth noting that unlike other plan notices, the QDIA notice is not mandatory. That is because plans are not required to use a QDIA as the default fund. For example, a money market fund is not a QDIA, but there are plenty of investment professionals who believe that in an uncertain economy, a money market is the most prudent choice.

Some plans choose not to designate a default at all. Rather, they make sure they have one-on-one meetings with each employee eligible for the plan to ensure investment elections are made. If all participants make elections, there is no need for a default investment.

Even if a plan does use a QDIA, there are no monetary penalties or compliance failures if the 30-day deadline is missed. The fiduciary “free pass” does not kick in until 30 days after the notice is provided, so the company should be sure to distribute the notice as quickly as possible.

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Topics: QDIA

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.