Qualified default investment alternative (QDIA)

What a QDIA is

When an employee is enrolled, automatically or otherwise, and gives no investment instructions, the plan has to put the money somewhere. The Department of Labor’s QDIA regulation says that if the plan uses a qualifying default and meets certain conditions, the participant is treated as having made the choice, and plan fiduciaries are relieved of liability for resulting investment losses.

Three types of investment qualify for the long term:

• A target date or life-cycle fund, with a mix based on the participant’s age or expected retirement date.

• A balanced fund, with a mix suited to the plan’s participants as a group.

• A professionally managed account.

A capital preservation fund qualifies only for the first 120 days after a participant’s first automatic contribution.

Why it matters to employers

Automatic enrollment sends money into the default for many employees, so the default often becomes the largest holding in the plan. The relief has conditions: participants must have had the chance to direct their own investments, must receive a notice at least 30 days before the first default investment and again each year, and must be able to move out of the default as often as other participants can change investments.

The relief also has limits. Fiduciaries still have to select the QDIA prudently and monitor it, including its fees.

Common mistakes

• Using a money market or stable value fund as the permanent default.

• Missing the initial or annual QDIA notice.

• Never reviewing the target date series after choosing it.

• Mapping employees to the wrong target year because birth dates in payroll are missing or wrong.

• Assuming the QDIA relief covers a poor choice of fund. It covers the outcome of a prudent default, not the selection.