Employers hoping to boost retirement plan participation through automatic enrollment are afforded certain protections for losses in default investment options, but fiduciary responsibility still requires the careful selection and care of such investments. Benefit advisers can add value with knowledgeable advice on qualified default investment alternatives, including through the use of selection tools.

Despite the benefits of participating in employer-sponsored retirement plans, approximately one-third of eligible workers do not participate in their employer's 401(k) plan, according to the Department of Labor. In an effort to combat low enrollment, the Pension Protection Act of 2006 created a provision that affords a “safe harbor” for plan fiduciaries using automatic enrollment to increase the overall participation rate in their plan.

The PPA extended existing liability protections to plan fiduciaries that select a default investment. As long as certain conditions are satisfied, plan sponsors will not be liable for losses that are a result of investing participants' contributions in a QDIA.

“With the growing volume of plan assets being invested in default investments, particularly target date funds, selecting a QDIA has become one of the most important responsibilities faced by plan fiduciaries,” says Rocco DiBruno, managing director at Thornburg Investment Management and director of the firm’s retirement group. “Plan fiduciaries look to their advisers for leadership in presenting a methodology for evaluating QDIAs and helping them create reports and other documentation to demonstrate compliance with this important fiduciary duty.”

The DOL regulations specify four types of QDIAs, from which benefit advisers and employers can choose:

1)       A product with a mix of investments that takes into account the individual’s age or retirement date (i.e. a life-cycle or target-date fund);

2)       An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (i.e. a professionally managed account);

3)       A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (i.e. a balanced fund); and

4)       A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).

Making a selection

In order to establish an effective procedure for the selection of a QDIA, it’s important to have a firm idea of the plan’s objectives, say advisers at Franklin Templeton Investments.

Rather than simply select the best performing investment within its category, they say, “It makes sense to do additional research to make sure that the investment's goals are aligned with the needs of your plan.”

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