Default investments

A QDIA isn’t really much different than what might have been considered a default investment option in the past – historically a money market fund – but with some key additional benefits and an expanded role.

Default investment options have always been with us. Employers that make profit sharing contributions often encounter instances where a participant receiving a contribution never makes an investment election. Those participant dollars went into the default investment option. For many years the thought was that the default investment should be a money market fund because the chance of loss was very low. Over the long-term, however, those investments would likely experience significant loss of purchasing power and so QDIA’s actually prohibit money market funds as an option.

The concept of QDIA’s sprang from the addition of auto enrollment features now available to employers. With auto enrollment there will almost always be a need for default investments as many of these new participants never actually sign up for the plan. QDIA’s accomplish two basic tasks. They offer a balanced, professionally allocated and diversified investment option to plan participants and provide fiduciary cover for the plan sponsor. Properly selected and monitored, plan fiduciaries are shielded from liability stemming from investment losses or insufficient gains resulting from these investment choices.

Target date and risk based funds are the most popular QDIA options so far but that doesn’t mean they are all the same. Some use exchange traded funds (primarily index funds) while others are a conglomeration of individual funds that are proprietary to the issuer of a target date fund series. Others focus on outside manager selection and in-house allocation of money to those managers – sort of a manager of manager’s approach. The idea of the QDIA no matter which form it takes is to provide some mechanism to default a participant’s investments to a fund that would be appropriate for that individual based on some criteria, usually age. These are default investments and participants can move their money to other investment options provided in the plan or from other investments into the QDIA if they choose to do so.

QDIA’s do offer some liability relief to plan fiduciaries but is still a duty to select and monitor the QDIA options so it’s important to not just “set-it and forget-it”.

Subject Reference Information