What is a 401(k) QDIA?
posted by Fisher 401(k) February 22, 2017
A 401(k) QDIA (Qualified Default Investment Alternative) is a default investment used when money is contributed to an employee’s 401(k) account, but the employee has not made their investment election. That money is automatically invested into the QDIA. The plan fiduciary—typically the business owner or 401(k) plan manager—is responsible for selecting the QDIA. If the plan has a default investment that meets the DOL's QDIA (Qualified Default Investment Alternative) rules, the plan fiduciaries are not liable for the QDIA's investment performance.
When should a 401(k) have a QDIA?
All 401(k) plans should have a QDIA, because all plans could at some point have business owners or employees saving without an investment election. Plans with automatic enrollment always need a QDIA, but other situations may occur over the life of a 401(k) that result in the need for a QDIA. These instances include:
- Employer contributions on behalf of an employee who isn’t contributing
- Incomplete enrollment forms
- Beneficiary or alternative payee balances
- Qualified domestic relations order
- Removal of investment options
- 401(k) rollovers
- Missing persons
There are four types of QDIAs. Selecting a QDIA saves the business owner from liability while helping employees save for retirement. Via the U.S. Department of Labor:
- A product with a mix of investments that takes into account the individual’s age or retirement date—like target date funds.
- An investment service that provides an asset mix (based on an employee’s current contributions and existing plan options) that takes into account the individual’s age or retirement date—like a managed account.
- A product with a mix of investments that accounts for the demographic characteristics of all employees, rather than each individual—like a balanced fund.
- A short-term, low-risk, low-return product (a “capital preservation” product) for only the first 120 days of participation—like a money market fund.
Advantages of having a QDIA
- For business owners: Having a QDIA relieves business owners and other plan fiduciaries of liabilities for investment losses. It also enhances the primary benefit of a 401(k) by automatically providing investments with the potential for long-term growth, regardless of how engaged the employees are.
- For employees: A QDIA protects employees from missing out on potential long-term growth when they don’t make an investment selection. This also simplifies investment decision-making by selecting the 401(k) investments for them, because that money will automatically be invested for long-term retirement savings.