What’s a QDIA?

[Updated article; original publish date January 4, 2024]

Is a QDIA required for a retirement plan?

No, it's not required. If you meet regulatory criteria, choosing a QDIA can reduce fiduciary liability. QDIAs must follow specific rules, provide required notices, and permit participants to direct their investments. 

Why do you need a default investment fund?

Your participants (and beneficiaries) can choose the investments for their 401(k) account from your plan’s investment lineup. But not all of them will provide explicit investment instructions, which is why you need to select a default investment fund for your retirement plan. Additionally, if your plan offers automatic enrollment, you need to know how to invest these contributions. 

You can pick any fund in your plan’s lineup as your default investment. Which one you choose depends, in part, on whether you want the fund to qualify as a QDIA. Let’s explore why this may matter to you.

What qualifies a default fund as a QDIA?

Not surprisingly, plan sponsors worry that investing participants’ money without their direction may increase their fiduciary liability. This concern led to the creation of QDIAs. Fiduciaries who select a QDIA as a default investment aren't liable for any investment losses that result from investing in the QDIA as long as all the following conditions are met:

• The plan allows participants and beneficiaries to select their own investments.
• An investment manager, plan trustee, plan sponsor, or an investment company registered under the Investment Company Act of 1940 manages the QDIA.
• The QDIA is a target-date fund (TDF) or lifecycle fund, balanced fund, or managed account.
• Participants and beneficiaries can opt out of the QDIA.
• Participants and beneficiaries can move money in and out of the QDIA as often as other participants and beneficiaries can change their investments. 
• The QDIA doesn’t impose fees or expenses when participants or beneficiaries transfer their money to another investment in the plan.
• The plan satisfies the QDIA notice requirements. Participants and beneficiaries must receive a notice explaining when money will be invested in the QDIA, along with their rights to opt out as well as transfer options, at least 30 days prior to their eligibility under the plan or when they make their first investment, and annually thereafter (at least 30 days before the start of each plan year).

You’re not required to use a QDIA—it’s up to you to decide if it’s right for your plan. Plan sponsors who use a QDIA aren't relieved of the distinct fiduciary duty to prudently select and monitor the QDIA.     

Another potential benefit—increased retirement readiness

If you do choose a QDIA, it can potentially improve your participants’ retirement readiness over the long term, helping them make progress on their goals. That’s because all QDIA options include a growth component (stocks and similar investments) and tie asset allocation to age, retirement date, or similar factors, while money market and stable value funds focus solely on capital preservation.

Factors to consider when choosing your QDIA

TDFs are the most common choice for QDIAs—87.2% of plans use a TDF as their default investment. But that doesn’t automatically make it the right choice for your plan. You need to consider many factors, including:

• Workplace demographics
• Employees’ investment experience
• Desired level of personalization
• Fees and expenses

For example, if your employees have limited investment knowledge, it may make sense to choose a TDF because they’re easier to understand than a managed account. If personalization is important, you may consider a managed account because TDFs are typically one-size-fits-all.

A dynamic QDIA is another possibility. How does this work? Employees are defaulted into a TDF until they reach a certain age, such as 40. At this point, they’re defaulted into a managed account where they can receive personalized investment advice. Your financial professional can help you decide the best approach for your plan.

Overcome participant inertia and reduce your fiduciary responsibility

Choosing your default fund requires careful consideration—not only because you have a fiduciary duty to act prudently, but because participants and beneficiaries tend to make few, if any, changes to their investment options. Once their money goes into the default investment, it’s likely to stay there. So, you should consider a default fund that can help your participants build their retirement savings while minimizing your risk. A QDIA can help you with both.

FAQs

What qualifies as a QDIA?

A QDIA is a diversified, professionally managed default investment used when participants don’t make elections. It can be a target-date/lifecycle fund, a balanced fund, or a managed account, managed by a qualified fiduciary or registered investment company. QDIAs must follow specific rules, provide required notices, and allow participants to opt out. 

Is a QDIA mandatory for 401(k) plans?

No, plans aren’t required to use a QDIA. Selecting a QDIA, however, can reduce fiduciary liability for investment losses if regulatory criteria are met, including allowing participant choice, meeting notice requirements, and permitting transfers without fees. Sponsors must still prudently select and monitor the default investment.

What are the benefits of using a QDIA?

A QDIA can help you manage fiduciary risk by providing safe harbor protection when you meet the required criteria. It also supports long term retirement readiness by allocating to growth assets (like stocks) rather than solely capital preservation options. QDIAs offer structured, age or risk-appropriate investing, allow participants to opt out or transfer, and deliver clear, standardized communications through required notices.

What types of funds can be used as a QDIA?

Acceptable QDIAs include target-date (lifecycle) funds, balanced (target-risk) funds, and professionally managed accounts. They must be diversified and managed by an investment manager, plan trustee, plan sponsor, or a registered investment company. Dynamic QDIA structures can combine TDFs early with managed accounts later for personalization.

What are the QDIA notice requirements?

Plans must provide initial and annual QDIA notices. Participants and beneficiaries receive a notice at least 30 days before eligibility or first investment explaining defaulting into the QDIA, their rights to opt out, and transfer options. You must deliver an annual notice at least 30 days before each plan year to reaffirm participant rights and explain how the QDIA works.