Qualified Default Investment Alternative

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Qualified Default Investment Alternative

An investment vehicle a fund manager may use for retirement plan contributions in the absence of direction from the plan participant. A qualified default investment alternative must be diversified, may not directly consist of securities in the company for which the plan participant works, and may not penalize the participant for early withdrawal. Qualified default investment alternatives were defined in the Pension Protection Act of 2006 as part of a broader effort to ease automatic enrollment in retirement plans.
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Of those plans, 90% use TDFs as their qualified default investment alternatives and assets in TDFs are at an all-time high of 34%.
Qualified default investment alternatives (QDIAs) are not naturally the type of retirement income planning tool that are at the back of a client's mind--if the client is aware of them at all.
The DOL notes that one requirement for qualified default investment alternatives (QDIAs) is that any participant, or beneficiary on whose behalf assets are invested, must have as frequent opportunities to transfer such assets "in whole or in part" to any other investment alternative available under the plan as do participants and beneficiaries electing to invest in the QDIA, and no less frequently than once in any three-month period.
To address this concern, the federal government has designated certain investments as qualified default investment alternatives (QDIAs).
After the passage of the Pension Protection Act of 2006 (PPA), there were often comments about how automatic enrollment, automatic escalation and qualified default investment alternatives (QDIAs) would eliminate the need to engage participants.
Qualified default investment alternatives include both target date funds and target risk (aka "lifestyle") funds.
The report suggests that other flexibility-inducing options designed to prevent leakage, such as allowing brokerage windows or "sidecar IRAs" inside a DC plan, could undermine adoption of qualified default investment alternatives.
Provided the plan adheres to certain rules, companies can automatically enroll participants in qualified default investment alternatives.
Nearly 40% of participants in plans with qualified default investment alternatives have an appropriate level of risk and diversification in their portfolios, compared with just 27% of participants in plans without QDIAs.
These include automatic enrollment of plan participants in defined contribution plans, many of them administered by insurance companies, allowing qualified default investment alternatives (QDIAs) to be offered through variable annuities, and the fact that the industry has gradually added mutual funds to its investment options.
Because of this, the law now allows plan fiduciaries to invest funds that are not being directed by plan participants into qualified default investment alternatives (QDIAs) that automatically make appropriate investment choices for employees based on age, lifestyles and risk.
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