On October 24 th. 2007 the Department of Labor (DOL) issued the long awaited qualified default investment alternatives (QDIA) final regulations. The DOL retained much of the proposed regulations, but also offer a few new opportunities as well as some new variables. Safe harbor relief is available to fiduciaries of participant-directed 401k plans where certain conditions are met. This safe harbor became effective December 24 th. 2007, only 60 days following issuance of the regulations.

The categories of investments qualifying for long-term relief are:

• lifecycle investment options, (Though risk-based lifestyle investment options are not explicitly mentioned in the regulations, the preamble to the regulations indicates that they may qualify as a QDIA under the “risk-based” category.)
• risk-based portfolios,
• and investment management services.

© Radim Strojek / Fotolia

A key component of qualification is the ongoing fiduciary responsibility to select and monitor these investment options based on objective analysis. Also, for plans utilizing the risk-based portfolio QDIA, the plan must determine the investment option’s initial appropriateness and whether the investment continues to be appropriate on an ongoing basis for the plan’s participant base (average age being the key component). There are also initial and annual participant notice requirements, with very specific timing requirements. Additional conditions must be met regarding investment restrictions and penalties, provision of materials to participants, and ability to redirect investments.

As expected, despite substantial lobbying by the insurance provider industry, capital preservation or stable value investments were not included as a long-term safe harbor alternative. The regulations do, however, allow their use as QDIAs under specific limited circumstances. These instruments may be used as a QDIA under the “limited duration QDIA” in which these options are utilized as the default account for a 120 day period following the participants first contribution to the 401k plan. Upon completion of the 120 day period, the money must be redirected to one of the previously listed long-term QDIAs for continued safe harbor relief. These investments may also be used as a QDIA under the “grandfathered QDIA” for defaulted monies held in these investments prior to the effective date of the regulations.

For More QDIA Information

This is only a brief overview of the 60+ page regulations and preamble issued by the DOL; there are many other important details that affect plan sponsors.

As a plan sponsor, you want to work with your retirement plan vendor  to provide you with all the information necessary in order to make a prudent and informed decision regarding your default account.  We encourage you to contact us for any help with QDIA.

Related Topics

qualified default investment alternative, qdia regulations, qdia

3A%2F%2F0.gravatar.com%2Favatar%2Fad516503a11cd5ca435acc9bb6523536%3Fs%3D70&r=G /% About Rick Holden

Rick Holden is a principal member and helped to establish the San Francisco office of Cambridge in 2002. Rick holds the Registered Representative and the Investment Advisor Representative designations by having passed FINRA’s Series 7 and Series 65 exams respectively. He is also a licensed insurance agent and designs comprehensive insurance plans for clients.