The QDIA Decision Most Committees Would Rather Not Reopen

In many retirement plan committee meetings, the QDIA gets thirty seconds on the agenda. Someone slotted a target-date series in as the default years ago, the box on the fund lineup is checked, and nobody wants to pry it open again. Participants are landing somewhere reasonable, so the committee leaves it alone.

The default is the most consequential investment choice the committee makes, and it rarely gets treated that way. For a large share of participants, especially the auto-enrolled ones who never log in, the QDIA is the entire portfolio. They will retire on whatever the committee picked years ago.

What the default is

The Qualified Default Investment Alternative comes from the Pension Protection Act of 2006, which added ERISA section 404(c)(5). The deal it offers is specific. Default a participant into a QDIA with proper notice, and the participant is treated as having exercised control over the account. The fiduciary is not liable for the resulting investment results. That relief is why the category exists.

The implementing regulation, 29 CFR 2550.404c-5, recognizes four categories: a life-cycle or target-date fund, a balanced fund, a professionally managed account, and a capital-preservation product, which only counts as a QDIA for the first 120 days. The first three are the long-term options. Park a stable value or money market fund as a permanent default and you get no QDIA relief past that 120-day window. Committees forget this often.

The relief depends on process. The plan has to furnish a QDIA notice at least 30 days before eligibility or the first default investment, and again each year. Participants have to be able to transfer out at least as often as they can move any other investment, and for the first 90 days there can be no transfer restrictions, fees, or surrender charges tied to the default. A good target-date series with a botched notice gets you nothing. The protection comes from the paperwork.

Target-date funds: the case for

Target-date funds won the QDIA contest by a wide margin. Industry surveys from Cerulli, the SPARK Institute, and PSCA put roughly seven in ten plan sponsors on a target-date default. Managed accounts sit far behind in the single digits. The reasons for that dominance are good ones.

They are cheap, especially the index-based series. They are simple to explain to a participant and to a committee. The glide path de-risks automatically as someone ages, with no input required from a person who will never provide any. The monitoring story is clean: you can benchmark a series, compare glide paths, watch fees, and document the review on a predictable cadence. For a committee that is short on time and aware of its liability, that clarity is worth real money.

The fair criticism is that a target-date fund knows one thing about a participant: an assumed retirement year. A 40-year-old with a paid-off house, a working spouse, and a pension gets the same allocation as a 40-year-old with three kids in daycare, a pile of debt, and a side business. The personalization is a calendar.

Managed accounts: the case for

A managed account addresses that. It can pull in salary, savings rate, outside assets, spouse information, and risk tolerance, then build an allocation around the person instead of the birth year. In theory that is a better answer for participants whose lives are more complicated than a single date.

The catches are real, and you should raise them in the meeting:

• They cost more, often materially, and the fee usually sits on top of the underlying fund expenses. Over a career, a higher ongoing wrap fee compounds against the participant.
• The personalization works only if the participant feeds it data. A managed account with no inputs is an expensive target-date fund. Engagement is the point, and many defaulted participants never engage.
• Monitoring gets harder. You are evaluating a methodology, an engagement rate, and whether the personalization reaches the people paying for it, instead of benchmarking one published series.

For an older, higher-balance, more engaged group, paying for personalization can be defensible. For a young workforce that rarely logs in, you may be charging people for a feature they will not use. The answer depends on the population, and the only way to know is to look.

The work is the process

When a participant sues over a default, the question is rarely whether a target-date fund was the objectively correct pick over a managed account. Courts ask whether you ran a prudent process to choose it and monitor it.

A defensible answer to why the plan uses this QDIA is a record. Did the committee look at the demographics of this specific plan? Did it weigh cost against personalization for this workforce? Did it write down why it chose what it chose, and against what alternatives? Is the choice in the investment policy statement? When did it last revisit the decision?

A managed-account default with no documented rationale is more exposed than a target-date default the committee chose deliberately, argued about, and re-reviewed each year. The product follows from the process. A person decides, and the system should record why, so that two years on, when memories fade and a participant complains, the file answers the question nobody can recall answering.

Reopen it on purpose

The ground under the default is shifting anyway. The DOL has opened the door to managed-account QDIAs that embed guaranteed lifetime income, which turns the old target-date-versus-managed-account choice into more of a spectrum. That alone is reason to drop the set-it-in-2014 posture.

You may not need to change anything. Plenty of committees will look hard, weigh cost against personalization for their own people, and keep the target-date series with full conviction. That is a fine outcome, and a very different one from never having looked. Put the QDIA back on the agenda this year, give it more than thirty seconds, and write down what you decided and why. If you do not reopen the decision, a plaintiff's attorney may reopen it for you.