QDIAs

Make investing easier with a default option for growth

Retirement plan participants sometimes struggle with figuring out how to invest their contributions. Perhaps that is why recent trends have seen many individuals forgo making these decisions themselves, opting instead to use professionally managed investment options.

According to data published by Vanguard, 36% of all Vanguard participants had their entire account balance invested in a single target-date fund, a single target-risk or traditional balanced fund, or a managed account advisory service in 2012 (compared with just 17% in 2007). The company believes that the growing popularity of these options demonstrates “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”¹

To make investing easier for participants, all of the investment options mentioned above can be used as qualified default investment alternatives (QDIAs) within a retirement plan.

A QDIA is an investment fund that can keep your client’s plan running smoothly if employees enroll but don't provide investment direction for their assets. Contributions are automatically invested in this fund unless employees make an alternative investment election.

The following investment types have been approved by the Department of Labor as acceptable default investments that may meet QDIA requirements:

• Balanced Funds – designed to meet the needs of participants with a balanced mix of stocks and bonds
• Lifecycle Funds – designed to meet participant needs based on participant age, a target retirement date, or life expectancy
• Managed Accounts – accounts managed by an asset allocation service
  
  

It used to be that the default investment option for employees enrolled in their company’s retirement plan generally focused solely on capital preservation. Unlike “cash equivalent” savings instruments like money market funds that struggle to keep pace with inflation, QDIAs are growth- and diversification-oriented investment alternatives that today’s employers can put in place for employees who don’t feel comfortable allocating assets on their own. Knowing that their money will be invested in a diversified, professionally managed fund can help them feel better about their contributions.

A QDIA can be especially helpful for employees who have been automatically enrolled in a retirement plan, as it provides an instant, disciplined investment program. PLANSPONSOR’s 2012 Defined Contribution Survey revealed that 82% of plan sponsors use a QDIA as the default investment for participants who are automatically enrolled in their defined contribution plan.²

Despite this number, there are still opportunities to make plan sponsors aware of how a QDIA can encourage better long-term savings rates for participants while providing fiduciary protection for employers. “I am still surprised by how many plan sponsors are unaware of these protections,” says Kathleen Connelly, executive vice president of Client Service at Ascensus. “The amount of education that a plan sponsor has on this subject definitely influences its decision on whether or not to use a QDIA with its plan.”³

You can help your clients understand how a QDIA can work for them by presenting it as a win-win situation. For example, by selecting a QDIA as the default investment for their plan, they not only help their employees invest for retirement, but they are also relieved of fiduciary liability related to the fund's performance. Further QDIA benefits are listed in the table below.

QDIA Benefits

Employer	Participant
Easy to implement	Provides a simple way to start saving
Simplifies plan management	Ensures that assets are invested in a qualified fund
Includes fiduciary protection	Provides automatic diversification and a better risk-reward balance

A QDIA may be the answer for clients looking to help employees get invested, whether they are automatically enrolled in a plan or if they feel that they aren’t knowledgeable enough to pick funds from a plan lineup. Talk to your clients about how these funds give employees a default investment option to start and grow their retirement savings.

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1 Source: Vanguard, "How America Saves 2013: A report on Vanguard 2012 defined contribution plan data." June 2013. https://pressroom.vanguard.com/nonindexed/2013.06.03_How_America_Saves_2013.pdf.
2 Source: PLANSPONSOR 2012 Defined Contribution Survey, quoted in Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057.
3 Source: Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057.