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After studying the effectiveness of qualified default investment alternatives (QDIAs) in retirement plans, the ERISA Advisory Council (EAC) has made recommendations to the Department of Labor – and sent three proposals to the DOL – regarding QDIAs. The EAC recommendations include creating a “tips document” to help fiduciaries in choosing QDIAs with lifetime income options, improving QDIA guidance, and providing for QDIAs in IRAs.
QDIAs are the default investment in a defined contribution plan, and they becoming increasingly important because of the growing role of auto-enrollment which automatically places participants in QDIAs. They have been effective in helping 401(k) participants achieve age-appropriate investment portfolios, however, no QDIA exists in IRAs.
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At a 3-day meeting in July, retirement experts encouraged the Council, to recommend that QDIAs become more prevalent in defined contribution plans. Experts explored the possibility of making lifetime income options, which SECURE 2.0 encourages employers to include in their retirement plans, more prevalent as QDIAs in 401(k) plans.
The EAC, which is a 15-member body representing employees, employers, the general public and various industries, advises the DOL on ERISA-related issues. In March, the EAC chose possible reforms to QDIAs as one of their research topics for this year.
Here are the EAC’s recommendations:
EAC recommendation No. 1: Issue a “tips document”
The EAC recommended that DOL create either regulatory or sub-regulatory guidance or a “tips sheet” which would “serve as a roadmap” for fiduciaries considering lifetime income options. This “could facilitate greater plan adoption” for lifetime income QDIA options, such as an annuity,” according to the council.
The document would focus on how to create a prudent process for selecting a lifetime income QDIA option. At a hearing in October, litigation risk was described by several members as a leading factor reducing the use of lifetime income options in QDIAs. This tip sheet is designed to provide guidance that could ease that anxiety for employers.
EAC recommendation No. 2: Provide guidance to plan fiduciaries
The EAC recommended that DOL improve the guidance provided to plan fiduciaries related to the QDIA in their plan. Members of the EAC agreed that QDIA disclosures should describe the investments that are in the QDIA in more detail because many participants see a QDIA “perceiving it to be an endorsement” and make no further inquiry, when disclosing the investment breakdown of a QDIA might make them select a different investment.
EAC recommendation No. 3: Allow QDIAs in IRAs
The EAC urged the DOL to take a look at QDIAs in IRAs, especially for involuntary rollovers – those funds forced out of a retirement plan into an IRA. Plans are permitted to rollover participant balances to a safe harbor IRA involuntarily if the balance is less than $7,000. However, these rollovers, as well as conventional rollovers, are typically defaulted to cash, which can severely damage the participant’s long-term financial security.
Related: ERISA Advisory Council explores how annuities can enhance 401(k)s
Vanguard published a whitepaper, Improving retirement outcomes by default: The case for an IRA QDIA, in July, which urged this same policy: “Cash is the de facto default for individual retirement account (IRA) contributions, despite being generally prohibited as a default investment option in 401(k) plans,” according to the report, continuing “Unless individuals voluntarily invest IRA assets, they tend to stay in cash indefinitely.”
QDIAs in IRAs would be especially helpful for accounts that were involuntarily rolled over, since those participants are often less engaged to begin with.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
