Skip to main content

Qualified Default Investment Alternatives

Approximately one-third of eligible workers do not participate in their employer-sponsored defined contribution plans, such as ERISA 403(b) and 401(k) plans. Research suggests that almost all of these workers would choose to remain participants if they were automatically enrolled. The increased savings would significantly improve their retirement security and may result in improved workplace satisfaction.

Some employers have adopted automatic enrollment plans and many more are interested, but the fact that they are potentially liable for investment losses that may occur in such plans has been a major deterrent to wider adoption of this plan design.

The Pension Protection Act (PPA) of 2006 removes several impediments from automatic enrollment plans. A key provision of the PPA is amending the Employee Retirement Income Security Act (ERISA) to provide a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction.

Conditions for Relief from Liability

ERISA provides relief from liability for investment outcomes to fiduciaries of individual account plans that allow participants to exercise control over the investment of assets in their plan accounts. The regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a qualified default investment alternative (QDIA). The following conditions must be met for fiduciary relief:

1. Assets must be invested in a QDIA. A QDIA:

  • Consists of one of the following types of investment products: Lifestyle or Target-Retirement Date Fund, Balanced Fund, Professionally Managed Account, Capital Preservation Product (only for the first 120 days after a participant’s first elective contribution to the plan) or Intermediate Investment Grade Bond Fund (only for assets that have been invested in such fund prior to Dec. 24, 2007)

  • Generally must not hold or allow the acquisition of employer securities (there are exceptions to this rule).

  • Must be either managed by an investment manager or an investment company registered under the Investment Company Act of 1940. 

  • Cannot impose restrictions, fees or expenses on the transfer of assets out of the QDIA within the first 90 days of the investment, and after the 90 day period, restrictions, fees and expenses that are applied to other participants that elect to invest in a QDIA may be applied.

  • Must be diversified so as to minimize the risk of large losses. 

2. Participants and beneficiaries must have been given an opportunity to provide investment direction, but failed to do so.

3. Participants must receive advanced notice of the potential investment in a QDIA at least 30 days in advance of the date of plan eligibility of the participant, at least 30 days in advance of any first investment in a QDIA on behalf of the participant, or on or before the date of plan eligibility of the participant, if the participant is given the opportunity to make a permissible withdrawal as allowed under the tax code. Advance and annual notices must contain the following descriptions and information:

  • Under what circumstances participant’s assets may be invested in a QDIA and, if applicable, under what circumstances elective contributions might be made on behalf of the participant and their right to elect to not have such contributions made.

  • QDIA description including objectives, risk and return characteristics, fees and expenses.

  • Participant’s right to redirect investment of the assets to another QDIA under the plan including restrictions, fees and expenses that may be associated with the transfer.

  • An explanation of where participants can obtain investment information regarding available investment alternatives.

4. Any material, such as investment prospectuses and other notices, provided to the plan by the QDIA must be furnished to participants and beneficiaries.

5. Participants and beneficiaries must have the opportunity to direct investments out of a QDIA with the same frequency available for other plan investments but no less frequently than quarterly, without financial penalty. Restrictions, fees or expenses are precluded on transfers during the first 90 days of investment in a QDIA.

6. The plan must offer a “broad range of investment alternatives” as defined in the Department of Labor’s (DOL) regulation under sec. 404(c) of ERISA.

7. Plan fiduciaries would not be relieved of liability for the prudent selection and monitoring of a QDIA.

Plan sponsors should review their policies and procedures and make sure that they meet the above requirements, make the necessary amendments to plan documents and determine what, if any, new notices need to be drafted. 

For more information see (the DOL’s Field Assistance Bulletin on QDIAs).  If you would like to talk to a dedicated retirement plan advisor, please get in touch by calling (800) 388-1963 or via e-mail at

Popular posts from this blog

What are Alternative Investments? 4-Part Introduction

The market has seen a lot of uncertainty in recent years. Because of this, many organizations are looking for new ways to diversify their investment portfolios. Our best-kept “not-so-secret” secret: alternative investments. In this blog, we'll explore alternative investments with a focus on how they can potentially shield your portfolios from downside market volatility. In addition, we'll break down its benefits and risks and whether it could be a good fit for you. Part 1: What are alternative investments? Alternative investments may help diversify your investment portfolios through non-traditional investment strategies. Non-traditional investment options have varying liquidity ranges depending on the strategy and fund structure. Alternative investments are sometimes referred to as alternative assets. According to the Harvard Business School , the seven types of alternative investments are: private equity; private debt; hedge funds; real estate; commodities; collectibles; and s

Section 125 – Cafeteria Plans Overview

A Section 125 plan, or cafeteria plan , allows employees to pay for certain benefits on a pre-tax basis. Employers use these plans to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Paying for benefits on a pre-tax basis reduces the employee’s taxable income and, therefore, reduces both the employee’s and the employer’s tax liability. To receive these tax advantages, a cafeteria plan must comply with the rules of Section 125 of the Internal Revenue Code and related IRS regulations. Under these rules, a Section 125 plan must have a written plan document and can only offer certain qualified benefits on a tax-favored basis. Once an employee makes a Section 125 plan election, they may not change that election until the next plan year, unless the employee experiences a permitted election change event. Also, for highly compensated employees to receive the tax advantages associated with a Section 125 plan, the plan must pass

5 Top reasons to offer employee mental health benefits

In fast-paced and demanding work environments, the importance of employee mental health benefits cannot be overstated. Employees who are mentally well are more productive, engaged and satisfied with their jobs. Mental health treatment, including therapy, medication and self-care, can help people who are experiencing mental illness. However, taking that first step toward recovery or seeking help can be challenging. The National Alliance on Mental Illness’ Mental Health By the Numbers finds that the average delay between the onset of mental health symptoms and treatment is 11 years. Factors such as cost, access and stigma can hold workers back from receiving the mental health support and treatment they need. However, there are employer solutions that can help employees overcome these barriers, understand available treatment options and start their recovery journey. This article explores barriers to mental healthcare and ways employers can help break them down to support employees holist