A QDIA is the investment a 401(k) plan puts a participant's money into when that participant is enrolled in the plan but has not chosen any investments.
QDIA stands for qualified default investment alternative. “Qualified” means the investment meets a specific set of requirements under ERISA, not that it is a better fund.
Four kinds of investments can serve as a QDIA, and one of them, a capital preservation fund, can only hold that role for 120 days.
Naming a QDIA does not end the committee's job. The committee still has to select that investment prudently and monitor it the same way it monitors every other fund on the menu.
QDIA Checklist
The QDIA Confirmation Checklist
An eight-page worksheet your committee fills in and files. Work through it in one sitting and you finish with a dated record of what your default is, when the notices went out, and why the committee chose the fund it chose.
QDIA stands for qualified default investment alternative.
Break that into its three parts. “Default” means the plan invests the money without the participant choosing. “Investment alternative” means a fund or a managed account on the plan's lineup. “Qualified” means the investment meets requirements set out in ERISA section 404(c)(5) and the Department of Labor regulation that interprets it.
“Qualified” sets no standard for whether the fund is a good choice for your plan. It says only that the investment is of a type the rules permit a plan to use as a default.
Why Does a 401(k) Plan Need a QDIA?
Picture a plan with automatic enrollment. An employee gets hired, does not fill out the investment election section of the enrollment form, and never logs in to the recordkeeper's site. Payroll starts withholding from that employee's pay at the plan's default rate. The money arrives at the recordkeeper on Friday. It has to go somewhere.
Without a named QDIA, the committee is choosing that employee's investment and cannot rely on the relief the regulation offers. With a named QDIA, the plan has a stated default, a notice that told the employee what the default was, and a documented reason the committee picked it.
Automatic enrollment is one of the three plan design decisions that separate strong 401(k) plans from average ones, and it is the decision that makes a named default investment necessary rather than optional.
Plans without automatic enrollment need a QDIA too. Any participant who enrolls and skips the investment election section creates the same question.
What Is the QDIA Notice Requirement?
The plan has to give each affected participant a written notice, and the timing is specific.
When the first notice goes out. A plan can meet the deadline one of two ways:
At least 30 days before the participant becomes eligible for the plan, or at least 30 days before money first goes into the default investment for that participant.
On or before the eligibility date, if the participant has the right to take a permissible withdrawal under Internal Revenue Code section 414(w).
After that, a notice goes out every year, within a reasonable period of at least 30 days before the start of each following plan year.
What the notice has to say. It has to be written so an average participant can understand it, and it has to cover five things:
When the plan will invest money in the default investment.
The participant's right to direct the investments in their own account.
A description of the default investment, including its objectives, its risk and return characteristics, and its fees and expenses.
The participant's right to move the money to another fund, and any restrictions or fees that apply to doing so.
Where the participant can get information about the other funds on the menu.
Who actually does it. The recordkeeper usually produces and delivers this notice. That does not move the responsibility off the plan. Ask the recordkeeper for a copy of what is being sent, confirm it names your current default investment, and keep a record of when it went out.
Can Participants Move Out of the QDIA?
Yes, and the rules put a floor under that right.
The first 90 days. The clock starts on the participant's first elective contribution, or on the first investment in the default if the plan has no automatic enrollment. During that window, the participant can move the money into any other fund on the menu without paying a charge for leaving. That covers surrender charges, redemption fees, exchange fees, and anything similar tied to getting out.
Note what this does not cover. The fund is not free for 90 days. Its ongoing operating costs still come out of the account the whole time, including the expense ratio, distribution fees, and the administrative expenses built into the fund. What the rule blocks is a penalty for walking away, not the normal cost of being invested.
After 90 days. The participant can still move the money. The only difference is that the usual trading rules for that fund now apply, the same ones that apply to someone who chose it on purpose. And as a floor, the plan has to allow a transfer out of the default at least once in any three month period.
Does a QDIA Protect the Plan Sponsor From Liability?
Partly, and the limits matter more than the protection.
When a plan meets the QDIA requirements, the participant is treated as having directed the investment. That means the committee is not answering for the investment results of a fund the participant was defaulted into.
The committee is still answering for two things. First, whether it selected that investment prudently. Second, whether it has monitored the investment since. The regulation states this directly: nothing in it relieves a fiduciary of the duty to prudently select and monitor the default investment, or of liability for failing to do so.
Monitoring the default investment is part of the same work as monitoring the rest of the menu, on the review schedule your committee already runs. A target date series that has drifted from the criteria in your investment policy statement is a problem whether or not it is the default.
If a participant challenges where their money went, a committee that ran a QDIA selection and documented it points to the selection record and the notice. A committee that named a default because the recordkeeper suggested it and never revisited the decision has to defend that fund on its own merits, with no record of why it was chosen.
Before Your Next Committee Meeting
Pull three documents and put them in front of the committee. The plan document or adoption agreement, to confirm which investment it names as the QDIA. The most recent QDIA notice the recordkeeper sent, to confirm it names that same investment. The investment committee minutes, to find the meeting where the committee selected that investment and wrote down why.
If any of the three does not exist or does not match the other two, fix that before your next quarterly review. Our QDIA Confirmation Checklist is a worksheet your committee fills in during one meeting, recording which default the plan uses, when both notices went out, and where the reasoning behind the selection is written down. Every line it cannot answer becomes an item with an owner and a date.
Plan Sponsor FAQs
The plan invests the money in whatever the plan has named as its default. That is what a QDIA is. The employee keeps the right to move it somewhere else at any point.
120 days, counted from the employee's first contribution. After that it stops qualifying, so a money market or similar principal-preservation fund cannot be a plan's standing default.
No. The relief covers how the money got there. Choosing that fund in the first place and watching it afterward are still the committee's job, and the regulation says so directly.
Employee Retirement Income Security Act of 1974, section 404(c)(5), 29 U.S.C. 1104(c)(5)
U.S. Department of Labor, Fiduciary Relief for Investments in Qualified Default Investment Alternatives, 29 CFR 2550.404c-5: https://www.law.cornell.edu/
Internal Revenue Code section 414(w), permissible withdrawals, as cross-referenced in 29 CFR 2550.404c-5(c)(3)(i)(B) and (c)(5)(ii)(A)
29 CFR 2550.404c-1(b)(3), broad range of investment alternatives, as cross-referenced in 29 CFR 2550.404c-5(c)(6)
Important Disclosures
First Hill Trust Company is a Washington State-chartered trust company. Investment advisory services are provided by BAC Capital Advisors, an SEC-registered investment adviser and a wholly owned subsidiary of First Hill Trust Company. Registration does not imply a certain level of skill or training. This article is educational. Neither First Hill Trust Company nor BAC Capital Advisors is acting as ERISA counsel or tax counsel to any plan or plan sponsor, and nothing here replaces advice from qualified counsel about your own plan.
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